Is the Economic Slowdown Over or Just Getting Started?
With US stocks up 11% YTD and nearly 19% since the Christmas Eve low, one could surmise that the economic slowdown that occurred in the back half of 2018 both globally and in the United States was a thing of the past, or at least would be over soon.
What Does a Humped Yield Curve Mean for Future Stock Market Returns
As many commentators have pointed out, the yield curve has developed a sort of humped form in recent months. That has led many to speculate about when the yield curve will invert, foreshadowing a recession. If, as the logic goes, the yield curve is about to invert then we all better take cover.
The Employment Report is Not All It’s Cracked up to Be
The “blowout” employment report, while strong in some respects, should be taken with a grain of salt. It’s important to remember that employment is a lagging indicator. Payroll employment often peaks either at the beginning or middle of recessions, so it provides virtually no warning of impending danger.
Five Indicators Suggesting 2000 may be a Better Analog than 1998
As a conceptual exercise, it may be useful to frame the current episode of market volatility (both upside and downside volatility) from the perspective of the stock market declines in 1998 and 2000.
There is Statistical Merit to this Oversold Condition in Stocks as Buying Opportunity
The oversold condition in stocks that has developed over the last several weeks is more than trivial. I highlighted on Christmas Eve the baker’s dozen reasons why equity markets could tactically rally from that point, showing extremes in a variety of indicators.
A Bakers Dozen Reasons Why Stocks Can Tactically Rally From Here
Stocks plunging to new lows on the year and to the lowest level since early 2017 is no way to bring in the holidays. Investors are in panic mode, with precious few precedence of this level of sustained selling outside of the 2008 meltdown.
Is 2019 Going to be the Year of the Profit Margin Problem?
2018 has been kind to corporate profit margins. In fact, the margin expansion we’ve seen so far in 2018 is unprecedented in a late cycle economic environment when wages are rising briskly, at least looking back over the last thirty years.
Was Today’s (11/28/18) Rally the All Clear Signal or More Noise?
The equity markets no doubt experienced a powerful move today on the back of Fed Chair Powell’s dovish remarks mid-day. Specifically, his comments laid the groundwork for a pause in interest rate hikes in the first quarter of 2018.
The Interest Rate Sensitive Sectors of the Economy are Getting Hit by Higher Rates, Which is Next?
It goes without saying that the most rate sensitive areas of the economy should feel the burn from higher rates first. It’s useful, therefore, to look at the performance of those sectors to get a read on the impact that changes in the rate environment are having on the real economy.
Good For a Bounce in Stocks, But How Much More?
The selling over recent weeks has been fast and intense, providing investors almost no relief. This type of short-term selling pressure has reached fever pitch levels that is usually indicative of some sort of relief rally, even if the ultimate lows are still ahead of us.
A GDP Report That Screams Trade Wars and Government Spending
Third quarter real GDP came in at a 3.5% QoQ annualized rate for the third quarter, above expectations for a 3.3% growth rate. The growth rate itself wasn’t much of a surprise, and frankly, neither were the drivers of growth.
Are We in for a Bond-pocalypse or Something Much Milder?
Is last week’s 18 basis point selloff in 10 year government bonds the start of a bond bear market or a market adjusting to the realities of the time, albeit in a somewhat disorderly way? The answer to this question has obvious implications for not just bonds, but all asset classes from equities to commodities to real estate.
Higher Mortgage Rates are Starting to Bite the Housing Market
Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing.
Wages Are Rising and The Phillips Curve is Not Dead
The Phillips Curve (the relationship between wages and the unemployment rate) finally awoke from its slumber with today’s unemployment report showing private sector wages rising 2.9% year-over-year and non-supervisory wages rising 2.8% year-over-year, the fastest growth rate since 2009.
Performance Trends Outside the US are Downright Bad
Chalk it up to strength of the US dollar, trade, policy risk, or whatever, stocks outside of the US are in bad shape. One of the ways we systematically measure the relative attractiveness of a stock in a particular sector, region or country is to calculate the percent of stocks in a group that are currently flashing a red performance alert.
Offsides Positioning in Gold, Bonds and the US Dollar Will Make for an Interesting Fall
We are living through a period of extremely crowded trades at the moment, as Jeff Gundlach notably quipped several days ago. The risk in crowded trades is of course that what would otherwise be relatively minor risk reversals can cause massive covering of positions resulting in large moves in the underlying.
A New Super Factor: the Investment Case for Knowledge
We’re pleased to share a new white paper on the market anomaly that rose above value, size, quality, low volatility and momentum factors. Written by Bryce Coward, CFA, the study details the results of first market test of the Knowledge Effect, the tendency of highly innovative companies to deliver excess returns.
If This Market is Anything, it’s Narrow
On a day like yesterday when more than half of the US tech sector was down more than 2%, we are reminded of the benefits of diversification. Yet, diversification would not have helped one participate in the market’s rise to the highest level since February.
The Inflation Story is Alive and Well in Five Charts
In light of Fed Chairman Powell’s congressional testimony, we thought it relevant to revisit the inflation story and provide yet more evidence that the trend in inflation continues to be higher. For now, the Fed has assessed the risks to inflation and growth as balanced in both directions, which is Fed-speak for a policy that is on auto pilot.
5 Indicators That Suggest The Selloff In EMs Has Gone Too Far
Emerging market stocks have taken it on the chin so far in 2018, down 9% and unperperforming the MSCI World Index by about 8%. There are of course plenty of excuses for such bad performance, from trade related issues to the breakdown of the synchronized global growth story.
Sitting Here in Limbo
As investors, it does feel like we are in limbo, stuck between the push of higher growth and employment and the pull of higher inflation, higher rates, and policy risk. And and the end of the day, despite quite a lot of directional volatility so far this year, the S&P 500 trades at the same level as it did back on January 4th.
The Selloff In Oil/Oil Stocks is Buyable
Energy stock fundamentals remain appealing. Global developed market energy stocks are still trading at recessionary valuation levels with the median dividend yield of 2.5% being near the highest recorded over the last two decades.
Financial Conditions are Tightening on the US Consumer
Rising oil prices, food prices and interest rates are likely to soon start taking a toll on the US consumer. Over the last year, gasoline prices are up 28%, the price of cornerstone crops like corn, soy and wheat are up between 5-16%, credit card interest rates have moved to an eight year high of 13.6% and the all important mortgage rate has risen to nearly 5%.
The Most Important Detail From the Flash PMI Report is About Inflation
Among yesterday’s data releases was the widely followed ‘flash’ PMI report produced by Markit, which showed that the Manufacturing PMI increased to the highest level since the 4th quarter of 2014. Unlike the final report, which gets published on the first day of the month, the advanced report lacks details on specific components.
Oil Is Breaking Out, So Are Inflation Expectations
After spending the last four months consolidating gains, crude oil is breaking higher again, and it’s taking inflation expectations with it. The break higher in crude isn’t surprising given that oil fundamentals haven’t been this good in years.
Uncharted Territory for Stock Valuations
Another month and another new high in equity valuations, at least relative to sales. Indeed, the median company in our developed world index (which covers the top 85% of companies in each country) just achieved a price to sales ratio that eclipsed the 2000 peak.
Mind The Gap, and Other Non-Confirmations of a Low
As political risk continues to escalate, we are, as always, keenly focused on risk management and the mitigation of potential losses. To those ends, we are monitoring indicators of market breadth for evidence that the worst of the shakeout is behind us.
The Good, the Bad, and The Ugly From the Market’s Retest of the February Lowbry
As our readers ponder the implications of trade wars and the possibility for moderately higher inflation – a circular loop if we ever did see one – we thought we’d evaluate the market’s behavior to see what kind of clues it’s giving us about its health.
The Fed Has the Direction of Prices Correct, but Could be Undershooting the Magnitude
Today the Fed hiked the Fed Funds rate by .25% and also updated their policy statement and the so called dot plot, which is a compilation of the FOMC members projections’ for GDP growth, unemployment and prices.
Why Financial Statements Don’t Work for Highly Innovative Companies
Several weeks ago three professors from the Columbia and Dartmouth business schools recapped some of their work on accounting for intangible investment in a Harvard Business Review article. Their key finding, which builds on Professor Baruch Lev’s analysis in The End of Accounting, is that, “accounting earnings are practically irrelevant for digital companies”.
The Employment Report Does Little to Defray the Likelihood of Higher Wage Growth
Today’s unemployment that featured above trend employment growth, a tick up in the participation rate, a flat unemployment rate and a little less wage growth compared to last month is being met with applause from the equity market.
Counter Cyclical Stocks Are Making New Relative Lows, Right on Cue
Counter cyclical stocks, those in the consumer staples, health care, real estate, telecom and utilities sectors, continue to have a tough go at things. In fact, as of two days ago this group of bond proxies made a new low compared to all developed market stocks, thereby continuing and reinforcing a trend that has been in place since the middle of 2016. Why is that?
Corrections Almost Always Test Lows Before They Are Complete
As we navigate a period of market turmoil, its important to remember that non-bear corrective phases typically last six weeks to two months and almost always include several several substantial large rallies followed by selloffs back to the range of the initial low.
If This Correction is Over, it Will Be Unique in Leaving Most Individual Stocks Unscathed
There are many different ways in which we can measure the severity of a market correction. The absolute peak-to-trough decline is one way. Duration of the drawdown is another. But we can also measure corrections by taking note of the performance of individual stocks, in what is akin to looking under the hood.
This Selloff Has Yielded Important Information Content
This selloff is demonstrably different than other corrections the market has endured this cycle in one important aspect: it has inflationary rather than deflationary notes to it. This is an extremely important point of context because it tells us something about market participants’ anxieties.
Four Market-Based Indicators That May Help Investors Identify Stock Market Fragility
With a hint of volatility returning to the stock market this week, we though it good timing to review some of the market-based indicators we follow that help us judge the sturdiness of the market. This is by no means an exhaustive list, but rather a few items to consider when evaluating whether pullbacks are for buying or selling.
The Stock Market is Extremely Overbought. Is That a Bad Thing or a Good Thing?
By now it’s common knowledge that the stock market is extremely overbought by nearly any measure one chooses to use. This has led many investors to infer a weaker forward return profile than usual on the logic that the normalization in the overboughtness of the market will cause a steep and lasting pullback in stocks.
Why Higher Inflation from Oil Prices Won’t Necessarily Result in Higher Long Rates
It’s no secrete that fluctuations in oil prices can lead to dramatic swings in headline price inflation, as chart 1 below shows. After all, not only does oil fuel the vast majority of transportation needs, it’s also a critical raw material used in consumer products far and wide, and much of the price swings in oil are passed on to consumers.
Oil Market Fundamentals Haven’t Been This Strong in Years
2018 has so far brought in the highest price of crude oil since late 2014 (chart 1), but we shouldn’t be surprised by the price action. Indeed, ignoring geopolitics for a moment, the fundamental picture for the crude markets haven’t been this favorable in years.
The Low Level of the VIX Isn’t a Mystery
The drop in the VIX to ultra-low levels in 2017 has been a point of consternation for market participants and largely misunderstood. Some market participants view the low level of the VIX as an indication of excessively positive sentiment among investors and thus a contrary indicator for the general direction of stock prices.
Bitcoin: What It Is And What It Isn’t
Bitcoin has garnered much mainstream media coverage in recent months which is the natural reaction to its meteoric ten-fold rise this year. The digital currency’s rise to about $11,000 today was met with awe, and then it quickly fell by 20% in a matter of hours, as has been widely reported.
The Fundamental Case for Japanese Stocks
We’ve been arguing for the last year that US-based investors would be well served to overweight foreign versus domestic equities. In this post we’ll dig into that topic a little deeper to try to convey a few of the company specific fundamental drivers of our foreign vs domestic call, especially as they relate to one of our favorite markets: Japan.
Knowledge Leader Spotlight: Microchip Technology Inc., a Fundamental Analysis
From time to time we illustrate our analysis of highly innovative companies in a Knowledge Leader spotlight. Today we look at Microchip Technology Inc. (MCHP), a highly innovative semiconductor manufacturer that produces programmable microcontroller products used in autos, computing and lighting, among many other applications.
International Equities are En Vogue, and Could Stay That Way
Over the last decade US stocks have outperformed the global equity benchmark by about 35% and have outperformed in eight of the last ten years prior to 2017. But that may all be coming to an end.