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.
The Consumer Staples Sector is No Place Hide
The Consumer Staples sector is often viewed as a safe haven; a sector that, because of its inherent cash flow stability, market participants can turn to as a place of refuge when things get shaky. Yet, persistent fundamental decline among North American Staples companies may well be throwing a wrench in these companies’ abilities to weather a broad market downturn.
How Much More Can We Eek Out of the Econ Data?
Several months ago we wrote that looser financial conditions should support economic data and stocks through year end. So far so good. Since then economic indicators such as the Markit manufacturing PMI have continued to chug higher and US stocks are up about 6%.
An Unremarkable GDP Report and Why Trend Growth is Still 2%
Today’s preliminary Q3 GDP number of 3% growth at a QoQ annualized rate has been met with a mix of relief and hope. Relief that one of the most destructive hurricane seasons ever didn’t completely sap growth and hope that two consecutive quarters of 3%+ growth is evidence that trend growth has, finally in the 9th year of this recovery, accelerated above 2%.
Chinks in the Armor and Its Implications for Asset Allocation
Indicators of market breadth are often useful in confirming or telegraphing important trend changes in equity markets. In simple terms, indicators of market breadth measure the level of participation of individual stocks in the general trend of the market.
The Rally in Energy Isn’t a Fluke
Since the middle of August the S&P 500 energy sector is up 11.5% compared to just 3% for the index as a whole. Many observers have chalked this outperformance up as a reaction to a deep oversold condition or a short covering bounce, but a growing amount of evidence suggests it may be more than that.
What Does the QE Experience Say About Rates in a Shrinking Fed Balance Sheet World?
The Federal Reserve is likely to decide next week to begin letting assets roll of its balance sheet as bonds mature, instead of reinvesting the proceeds. This means that the balance sheet will begin to shrink in size and other market participants will be forced to absorb the supply of new issuance of treasury and mortgage backed securities.
Global PMIs Are Very Strong, But Does That Mean Anything For Stocks?
The upturn in global PMIs over the last year has been substantial and for the first time in years the world’s developed economies appear to be expanding in unison. As we can see in the table below, the color of the board has moved from red to green, indicating that nearly every major DM country is seeing improving PMIs.
Investors Should Pay Attention to the Foreign Materials and Energy Sectors
We’ve been talking at length recently about the attractiveness of foreign, cyclical stocks. While foreign developed markets are attractive, emerging markets are especially attractive from a valuation perspective and are also benefiting from what we think is just the beginning of a persistently weak US dollar environment.
Cyclical Indicators Are Providing a Boost to the Global Materials Sector
It may be an overlooked fact that the global materials sector is the best performing sector over the last three months (up 8.6%), the second best performer over the last month (up 2.7%) and the third best performer over the last week (up 1.3%).
A Mini-Correction, but No Capitulation (Yet): Three Internal Indicators that Should Point to the Nex
The last week has witnessed the return of multi-directional volatility in the equity markets for the first time since just before the election in the United States last November. At this point we have little reason to suspect the 2% mini correction in the S&P 500 will turn into a major downside swoon.
Looser Financial Conditions Should Support Economic Growth and Stocks in the Second Half
Proxy metrics for financial conditions from the US dollar, to interest rates to corporate bond spreads have been loosening since June and suggest continued moderate economic growth in the second half of 2017 and a firm equity market.
Despite Earnings Season Beats, Analyst Expectations Have Barely Budged
By most accounts the Q2 earnings reporting season has been a good one, with most companies surprising to the upside and some offering improved guidance for future numbers. In fact, according to FactSet, more companies have posted a positive sales surprise in Q2 than any quarter going back at least five years.
6 Reasons and 21 Charts Arguing for Continued Foreign Stock Outperformance
As our regular readers are aware, we’ve been pounding the table all year arguing that foreign stocks are in a position to structurally outperform domestic stocks. At the risk of sounding like a broken record, we thought we would – in one post – review the setup that makes foreign equities relatively attractive at this juncture.
Calibrating the Energy Sector’s Potential Outperformance
It’s news to no one that energy has been the worst performing sector year to date with plenty of hatred of the sector to go around. Yet, as we write the price of WTI crude oil is up about 2% on news of capex cuts and OPEC’s apparent moves to reign in production and exports.
Can Financials be Leadership with a Flattening Yield Curve?
The financial sector has been getting a lot of attention recently with earnings announcements so we thought we’d weigh in on one aspect of financial stock relative performance that is making it difficult for financials to truly lead this market higher: the flattening yield curve.
One (more) Reason to Expect the USD to Continue to Fall
The USD is weak again today and plunging lows not seen for 15 months. The “obvious” reasons for the USD weakness include converging foreign economic activity, more hawkish foreign monetary policies, and a general overvaluation of USD.
Are Investors Switching From Active to Passive or From Passive to Cheaper Passive?
It’s been awhile since we’ve weighed in on the active/passive debate so we thought we’d toss our hat in the ring yet again and try to explain the asset migration that is taking the fund management industry by storm.
Mixed Employment Report Points to More of the Same for Economic Growth
Today’s payroll beat of 222,000 nonfarm jobs being added to the economy in June should be viewed in a larger context of overall slowing employment statistics that all point to the US economy remaining in its relatively weak and slowing trend.
Three Reasons to Expect a Stronger Euro in the Months to Come, and What it Means for Your Portfolio
With the euro up another 50bps today against the USD, we thought it timely to review some fundamental factors that should act to support the longer-term trend higher in the euro.
How Much Longer Can Speculators Get of Bonds?
The last six months has seen one of the most incredible changes in investor positioning in 10-year US treasury bonds in recent history. Back in early January, around the time rates peaked, non-commercial traders (AKA speculators) were net short 10-year options and futures contracts by a whopping 17% of open interest.
Where in the World Can Value be Had in the Equity Markets?
To say that value is difficult to find in the global equity markets would be an understatement. In fact, when we look at all 44 of the developed market regions and regoin/sectors, what we find is that in only ten of them is the median company trading at a discount to its own 10-year average multiple.
USD, Valuations, Probability of Rising Budget Deficit all Point to US Equity Underperformance
With the USD now about 5% off its January peak and having made a series of four lower lows and lower highs, it’s fair to say that the period of US dollar strength we witnessed for most of 2016 has come and gone.
As Econ Data Slows, How High Can Rates Rise?
From the middle of April through yesterday 10-year treasury rates rose from 2.17 to 2.40, prompting the obvious question of how high will they rise. The interesting thing about the recent slight backup in rates is that it has occurred within the context of slowing economic data.
Is the USD Bull Market Over and What That Would Mean for Your Portfolio
Since the beginning of 2017, the US dollar has struggled against nearly every major currency, calling into question the idea that the US dollar is still in a bull market. Indeed, since the dollar made its cyclical high on the first day of 2017 trading,
Bond Yields Break Below Important Support as Econ Data Notches South
After testing and bouncing off the important 2.32% level four times so far in 2017, the US 10-year bond finally broke below that important threshold. The phenomenon has gone basically unnoticed by the financial commentators, but it occurs just as US economic data begins to wane following the bounce that started in the second half of 2016.
Stocks, Bonds, USD all Reverse Course Following Fed Minutes
It was shaping up to be a pretty good day for stocks until the Fed minutes dropped the balance sheet hammer on the markets this afternoon. In the minutes detailing the discussion at the March meeting, Fed officials suggested they might begin draining the balance sheet later this year.
If Trump Gets Taxes and Infrastructure, Who Pays, and What Does it Mean for Stocks?
With the dissolution of health care legislation barely final, murmurers out of Washington seem to suggest tax reform/cuts and infrastructure may be tackled in tandem in a way that attracts bipartisan support.
Which is it: .9% or 2.8%, and Does it Even Matter?
As the first quarter nears its end there is some debate as to where Q1 GDP growth will come in. As recently as yesterday the Atlanta Fed GDPNow estimate had GDP growth of .9% and this morning the NY Fed’s Nowcast is expecting 2.8%.
Is the Snap Back in Rates Really that Surprising?
The post-Fed action in the bond market yesterday was impressive, yet left some begging for answers. If the Fed raised short rates yesterday and reiterated its plans for the subsequent five rate increases through 2018, shouldn’t the long-end be selling off? If it were only that easy.