Thursday, December 13, 2018
Market Watch: Top 50 Finance Twitter Accounts for Investors to Follow in 2019
Many thanks to the people at MarketWatch for including us on their list of the Top 50 Finance Twitter Accounts for Investors to Follow in 2019. The full list is here.
Saturday, December 8, 2018
Weekly Market Summary
Summary: Emerging markets are in a bear market. Europe and the Nasdaq are getting close. After falling 10% in October, SPX has been unable to sustain a rally. Even bearish sentiment, washed out breadth and the prospect of Santa Claus can't seem to rally stocks.
In real time, corrections always feel like they are the end of the bull market: the price pattern is bearish and the news emphasizes stories about a likely recession, poor forward earnings and geopolitical risks. Yet corrections usually happen every 18 months, and the current one has so far not been especially long or deep.
That is not to suggest that investors be complacent or dismissive of mounting risk. SPX had formed a topping pattern in August, and events since then have only strengthened this pattern. But there is little evidence of the underlying stress that is normally associated with big problems. For all the recent volatility, it is worth noting that the low in SPX was in October, 6 weeks ago. Everything since then has been a hot mess.
This is not a market trying to efficiently discount next year's growth; it's a market mostly driven by fear and emotion.
The correction from the September all-time high (ATH) is now in its 11th week. Aside from the NDX, all the US indices are now negative for the year. So are treasuries (TLT). What's worked well so far in 2018? Volatility, which is up more than 40% (table from alphatrends.net). Enlarge any chart by clicking on it.
In real time, corrections always feel like they are the end of the bull market: the price pattern is bearish and the news emphasizes stories about a likely recession, poor forward earnings and geopolitical risks. Yet corrections usually happen every 18 months, and the current one has so far not been especially long or deep.
That is not to suggest that investors be complacent or dismissive of mounting risk. SPX had formed a topping pattern in August, and events since then have only strengthened this pattern. But there is little evidence of the underlying stress that is normally associated with big problems. For all the recent volatility, it is worth noting that the low in SPX was in October, 6 weeks ago. Everything since then has been a hot mess.
This is not a market trying to efficiently discount next year's growth; it's a market mostly driven by fear and emotion.
* * *
The correction from the September all-time high (ATH) is now in its 11th week. Aside from the NDX, all the US indices are now negative for the year. So are treasuries (TLT). What's worked well so far in 2018? Volatility, which is up more than 40% (table from alphatrends.net). Enlarge any chart by clicking on it.
Friday, December 7, 2018
December Macro Update: Recession Risk Low, But Starting To Rise
Summary: The macro economic story is starting to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.
For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
Friday, November 16, 2018
3Q Corporate Results Were Great. The Outlook for 2019 Looks Far Too Optimistic
Summary: Overall, corporate results in the third quarter were excellent. S&P sales grew 11%, earnings rose 30% and profit margins expanded to a new all-time high of 12.2%.
Fundamentals have been driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself (meaning, valuations contracted). The strong growth in company profits is not due to a net share reduction (e.g., buybacks) either.
Looking ahead, expectations for 10% earnings growth in 2019 looks far too optimistic and will likely be revised downward as the substantial jump in margins this year is unlikely to continue. Even maintaining these margins will be a stretch, and earnings are at risk of falling. Dollar appreciation and declining oil prices are additional headwinds.
Valuations are now slightly below their 25-year average. They are not cheap, but the excess from early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand. With earnings growth at risk, the key for share price appreciation in 2019 is likely to hinge on valuations expanding.
90% of the companies in the S&P 500 have released their third quarter (3Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Quarterly sales reached a new all-time high, growing 11% over the past year. On a trailing 12-month basis (TTM), sales are 10% higher yoy, the best growth in 12 years (since 2006; all financial data in this post is from S&P). Enlarge any image by clicking on it.
Fundamentals have been driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself (meaning, valuations contracted). The strong growth in company profits is not due to a net share reduction (e.g., buybacks) either.
Looking ahead, expectations for 10% earnings growth in 2019 looks far too optimistic and will likely be revised downward as the substantial jump in margins this year is unlikely to continue. Even maintaining these margins will be a stretch, and earnings are at risk of falling. Dollar appreciation and declining oil prices are additional headwinds.
Valuations are now slightly below their 25-year average. They are not cheap, but the excess from early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand. With earnings growth at risk, the key for share price appreciation in 2019 is likely to hinge on valuations expanding.
* * *
90% of the companies in the S&P 500 have released their third quarter (3Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Quarterly sales reached a new all-time high, growing 11% over the past year. On a trailing 12-month basis (TTM), sales are 10% higher yoy, the best growth in 12 years (since 2006; all financial data in this post is from S&P). Enlarge any image by clicking on it.
Interview With Financial Sense on Macro Risks and The Market Correction
We were interviewed by Cris Sheridan of Financial Sense on November 12th. During the interview we discuss the macro-economic environment, specific risks that are unfolding and current market technicals as stocks suffer their second correction in 2018. One theme of our discussion is what to look for over the next several months.
Our thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.
Listen here.
If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.
Our thanks to Cris for the opportunity to speak with him and to his editor for making these disparate thoughts seem cogent.
Listen here.
If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.
Tuesday, November 13, 2018
Fund Managers' Current Asset Allocation - November
Summary: Although US equities are up about 2% in 2018, Europe is down 10% and emerging markets are down more than 15%. Part of the reason: fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs.
How have fund managers responded to an increasingly tough environment for equities?
In one respect, they are still bullish: global equity allocations are still 31% overweight. Into the major lows in 2011, 2012 and 2016, fund managers were underweight. Allocations could easily fall much further before global equities reach a bottom.
But in most other respects, fund managers are already very bearish:
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and neutral equities. Enlarge any image by clicking on it.
How have fund managers responded to an increasingly tough environment for equities?
In one respect, they are still bullish: global equity allocations are still 31% overweight. Into the major lows in 2011, 2012 and 2016, fund managers were underweight. Allocations could easily fall much further before global equities reach a bottom.
But in most other respects, fund managers are already very bearish:
They are overweight cash (by nearly one standard deviation), which is typically a tailwind for equities.
They view the US dollar as the most overvalued in 12 years, which has a very good track record of marking a turn to dollar weakness, a tailwind for US multi-nationals as well as ex-US equities.
Their profit expectations are the most bearish in 6 years, and at a level which also marked equity lows in 2010, 2011, 2012 and 2016.
Their global macro growth expectations are the most pessimistic in 10 years, more than at the major equity bottoms in 2011 and 2016.
A third believe the world's largest equity benchmark, the S&P 500, has already peaked. This number holding this view has doubled in just one month.
They believe 'value' will outperform 'growth' stocks; similar peaks (in 2009, 2014, 2016 and 2017) marked excellent times to be long equities, especially growth stocks.
The US is the most favored region in the world. That's not surprising: during a global equity sell off, the US is usually regarded as the safest haven. It should underperform. Europe is the most hated region and is likely to outperform.
* * *
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and neutral equities. Enlarge any image by clicking on it.
Within equities, the US is overweight while Europe, in particular, is underweight. This is a significant change from the past year.
A pure contrarian would overweight European equities relative to the US and underweight cash.
Monday, November 12, 2018
Weekly Market Summary
Summary: US equities rallied more than 6% from the October 29 closing low, but have since fallen back 3%. This is likely part of the "low retest" that accompanies most market corrections; "V-bounces" are not the norm.
The trend is bearish, but it is at odds with the solid economic environment. That conflict almost always ultimately resolves in favor of the bulls. By some measures, investor sentiment is among the most bearish since March 2009; even in a bear market, equities will experience a strong rally before rolling over. Seasonality is a substantial tailwind through year-end. Risk-reward over that period is again skewed higher.
After falling 10% during October, US equities have rallied the past two weeks, with SPX gaining more than 2% each week. NDX fell 3% today but it is up the most - about 7% - so far in 2018 (table from alphatrends.net). Enlarge any chart by clicking on it.
The trend is bearish, but it is at odds with the solid economic environment. That conflict almost always ultimately resolves in favor of the bulls. By some measures, investor sentiment is among the most bearish since March 2009; even in a bear market, equities will experience a strong rally before rolling over. Seasonality is a substantial tailwind through year-end. Risk-reward over that period is again skewed higher.
* * *
After falling 10% during October, US equities have rallied the past two weeks, with SPX gaining more than 2% each week. NDX fell 3% today but it is up the most - about 7% - so far in 2018 (table from alphatrends.net). Enlarge any chart by clicking on it.
Friday, November 2, 2018
November Macro Update: New Employment Among Highest Since 2000
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
Wednesday, October 31, 2018
What Today's Trend Following Sell Signal Implies For The Months Ahead
Summary: With SPX closing below its 10-month moving average, a sell signal for a popular trend following system triggered today. This system has handily beaten the long-term performance of just holding SPX.
So what happens next? Using data from the last 38 years, there is an even chance that SPX reverses direction and moves higher from here over the months ahead. But the October low - or very close to it - appears likely to be retested in November.
After rising every month for 6 months since the end of March, and in the process gaining more than 10%, US equities fell hard in October. SPX dropped 7%, NDX 9% and small caps 11%.
This was the third worst month since the bull market started 116 months ago in March 2009; only May 2010 (flash crash) and August 2011 (European debt crisis) were worse.
The fall was enough to trigger a sell signal in a popular trend following system.
Trend following dispenses with the debate about recessions, the actions of the Fed, corporate earnings, valuations, China, investor sentiment, market breadth, and all the rest. It focuses purely on price and implicitly assumes that it reflects the most useful information available.
How does it work? As described by Meb Faber here, investors stay long when SPX is above its 10-month moving average (MMA) at month end and move to cash when it closes below. That's it. The system's long term track record is excellent (red line), handily beating the SPX (blue line) and 80-90% of professional investors (more on that here). Enlarge any chart by clicking on it.
So what happens next? Using data from the last 38 years, there is an even chance that SPX reverses direction and moves higher from here over the months ahead. But the October low - or very close to it - appears likely to be retested in November.
* * *
After rising every month for 6 months since the end of March, and in the process gaining more than 10%, US equities fell hard in October. SPX dropped 7%, NDX 9% and small caps 11%.
This was the third worst month since the bull market started 116 months ago in March 2009; only May 2010 (flash crash) and August 2011 (European debt crisis) were worse.
The fall was enough to trigger a sell signal in a popular trend following system.
Trend following dispenses with the debate about recessions, the actions of the Fed, corporate earnings, valuations, China, investor sentiment, market breadth, and all the rest. It focuses purely on price and implicitly assumes that it reflects the most useful information available.
How does it work? As described by Meb Faber here, investors stay long when SPX is above its 10-month moving average (MMA) at month end and move to cash when it closes below. That's it. The system's long term track record is excellent (red line), handily beating the SPX (blue line) and 80-90% of professional investors (more on that here). Enlarge any chart by clicking on it.
Sunday, October 28, 2018
Weekly Market Summary
Summary: US equities are down 10% from their all-time highs just 5 weeks ago. The trend in equities has turned bearish, and that is not something that should be taken lightly. The evidence pointing to a major top being formed has further increased. But the set up for higher prices, at least before a significantly lower low, appears to be very strong. This is not a certainty, but it is a high probability.
After falling 4% two weeks ago, and then closing a bit higher last week, US equities this week again fell 4%. They are down about 10% for the month of October. The nearly 10% gain in 2018 at the end of September for SPX is now all gone. Small caps have been hit the hardest and are now down 3% for the year (table from alphatrends.net). Enlarge any chart by clicking on it.
* * *
After falling 4% two weeks ago, and then closing a bit higher last week, US equities this week again fell 4%. They are down about 10% for the month of October. The nearly 10% gain in 2018 at the end of September for SPX is now all gone. Small caps have been hit the hardest and are now down 3% for the year (table from alphatrends.net). Enlarge any chart by clicking on it.
Monday, October 15, 2018
Weekly Market Summary
Summary: Equities fell 4-5% last week and have given up most of their 2018 gains so far in October. This might feel like the start of a bear market, but that is the least likely outcome.
US equities fell 4-5% last week. The nearly 10% gain in 2018 at the end of September for SPX has been reduced to just 3%. Small caps have been hit the hardest and are now barely above their level at the start of the year (table from alphatrends.net). Enlarge any chart by clicking on it.
* * *
US equities fell 4-5% last week. The nearly 10% gain in 2018 at the end of September for SPX has been reduced to just 3%. Small caps have been hit the hardest and are now barely above their level at the start of the year (table from alphatrends.net). Enlarge any chart by clicking on it.
Friday, October 5, 2018
October Macro Update: Economic Data Suggests US Equity Bull Market Will Continue
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
Friday, September 21, 2018
Fund Managers' Current Asset Allocation - September
Summary: Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs.
9 months later, global equity allocations are nearly the lowest since November 2016. Moreover, cash balances are high. Globally, investors are relatively bearish. How can this be?
The reason is mostly outside of the US. While US equities are at all-time highs, both European and emerging markets are down in 2018. That has impacted investors' regional allocations in an important way.
After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.
Fund managers are now underweight emerging market equities by the most in 2-1/2 years; the region is now a contrarian long. Europe is neutral, as are global bonds.
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and underweight equities. Enlarge any image by clicking on it.
9 months later, global equity allocations are nearly the lowest since November 2016. Moreover, cash balances are high. Globally, investors are relatively bearish. How can this be?
The reason is mostly outside of the US. While US equities are at all-time highs, both European and emerging markets are down in 2018. That has impacted investors' regional allocations in an important way.
After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.
Fund managers are now underweight emerging market equities by the most in 2-1/2 years; the region is now a contrarian long. Europe is neutral, as are global bonds.
* * *
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and underweight equities. Enlarge any image by clicking on it.
Within equities, the US is overweight while emerging markets in particular are underweight. This is a significant change from the past year.
A pure contrarian would overweight emerging markets equities relative to the US and underweight cash.
Monday, September 17, 2018
Weekly Market Summary
Summary: Mid-way through September, US equities are flat to lower for the month. The longer term trend is positive but the near-term outlook is unfavorable. It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.
Mid-way through September, US equities are flat to lower for the month (table from alphatrends.net). Enlarge any chart by clicking on it.
* * *
Mid-way through September, US equities are flat to lower for the month (table from alphatrends.net). Enlarge any chart by clicking on it.
Friday, September 7, 2018
September Macro Update: A New 49 Year Low in Unemployment Claims
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.
Tuesday, September 4, 2018
Weekly Market Summary
Summary: SPX, NDX, small caps as well as broad measures like the Russell 3000 - which equals 98% of total US market capitalization - made new all-time highs (ATHs) last week. Even when indices are adjusted for the dominant FAAMNG companies, the remaining 99% of stocks also at new ATHs. The trend is clearly higher, and several new momentum studies suggest that equities are likely to gain more before year-end.
If there is a reason for caution, the risk is mostly short-term (within the next month) and probably not very significant, as explained in this post.
US equities rose for a 5th month in a row in August, gaining 4-6%. Through the first 8 months of the year, SPX is up 9% while the Nasdaq-100 is up 20% (table from alphatrends.net). Enlarge any chart by clicking on it.
If there is a reason for caution, the risk is mostly short-term (within the next month) and probably not very significant, as explained in this post.
* * *
US equities rose for a 5th month in a row in August, gaining 4-6%. Through the first 8 months of the year, SPX is up 9% while the Nasdaq-100 is up 20% (table from alphatrends.net). Enlarge any chart by clicking on it.
Sunday, August 19, 2018
Weekly Market Summary
Summary: US equities have returned to, and in some cases exceeded, their January all-time highs. The trend is clearly higher and several new momentum studies suggest that equities are likely to gain more into year-end. Recent macro and corporate results data also support the ongoing equity bull market. Despite the gains over the past 5 months, investor sentiment is not frothy.
What's new is that US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August. This is how every major top in the past 40 years has started. On it's own, this doesn't suggest a major top is near. But in January, not even a topping pattern was visible in US stocks. That's no longer true.
Trade war rhetoric continues to provide sharp, interim market volatility. This week, the US and China resume trade talks for the first time in two months.
Halfway through August, US equities are on pace for a monthly gain of 2-4% (table from alphatrends.net). Enlarge any chart by clicking on it.
What's new is that US equities now have a topping pattern in place: the momentum high in January has been followed a price high in August. This is how every major top in the past 40 years has started. On it's own, this doesn't suggest a major top is near. But in January, not even a topping pattern was visible in US stocks. That's no longer true.
Trade war rhetoric continues to provide sharp, interim market volatility. This week, the US and China resume trade talks for the first time in two months.
* * *
Halfway through August, US equities are on pace for a monthly gain of 2-4% (table from alphatrends.net). Enlarge any chart by clicking on it.
Tuesday, August 14, 2018
2Q Corporate Results: All-Time High Sales, Profits and Margins
Summary: Overall, corporate results in the second quarter were excellent. S&P sales grew 11%, earnings rose 27% and profit margins expanded to a new all-time high of 11.4%.
Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.
The outlook in 2018 looks solid: the consensus expects earnings to grow 21% this year. Rising energy prices and the tax reform law are tailwinds.
Expectations for 10% earnings growth in 2019 looks too optimistic and will likely be revised downward; the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest expenses rising.
Valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand.
90% of the companies in the S&P 500 have released their second quarter (2Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Quarterly sales reached a new all-time high, growing 11% over the past year, the best sales growth in 7 years (since 2011). On a trailing 12-month basis (TTM), sales are 9% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.
Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself. The strong growth in company profits is not due to the net reduction in shares through, for example, corporate buybacks.
The outlook in 2018 looks solid: the consensus expects earnings to grow 21% this year. Rising energy prices and the tax reform law are tailwinds.
Expectations for 10% earnings growth in 2019 looks too optimistic and will likely be revised downward; the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest expenses rising.
Valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been worked off. If investors once again become ebullient, there is room for valuations to expand.
* * *
90% of the companies in the S&P 500 have released their second quarter (2Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Quarterly sales reached a new all-time high, growing 11% over the past year, the best sales growth in 7 years (since 2011). On a trailing 12-month basis (TTM), sales are 9% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.
Friday, August 3, 2018
August Macro Update: Recession Risk Remains Low
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into early 2019 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into early 2019 at a minimum. Enlarge any image by clicking on it.
Thursday, July 26, 2018
The Top 5 Stocks Are Big. And They're Outperforming. This Is Normal
Summary: The 5 largest stocks comprise about 16% of the S&P 500. That's normal. In fact, the importance of the top 5 stocks was far greater in the 1970s than anytime in the past 5 years.
It's true that today's top 5 stocks - known by the acronym FAAMG - have largely outperformed most other stocks. That's how they became today's top 5. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed. This is the story of the stock market. Only one of today's top 5 was also in the top 5 in 2013. At the height of the tech bubble in 2000, the top 5 were companies like GE, Exxon, Pfizer, Citigroup and Cisco.
Right now, most stocks are doing fine: an index in which non-FAAMG stocks have a 99% weighting closed at the second highest level in its history today. It's on pace for a 10% gain in 2018.
It's true that today's top 5 stocks - known by the acronym FAAMG - have largely outperformed most other stocks. That's how they became today's top 5. Over time, stock indices have typically been driven higher by a small number of stocks. And over time, those leaders have continually changed. This is the story of the stock market. Only one of today's top 5 was also in the top 5 in 2013. At the height of the tech bubble in 2000, the top 5 were companies like GE, Exxon, Pfizer, Citigroup and Cisco.
Right now, most stocks are doing fine: an index in which non-FAAMG stocks have a 99% weighting closed at the second highest level in its history today. It's on pace for a 10% gain in 2018.
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The 5 biggest stocks in the S&P 500 - known by the acronym FAAMG - are equal to the smallest 282 stocks. Enlarge any chart by clicking on it (from Michael Batnick).
Sunday, July 22, 2018
Weekly Market Summary
Summary: US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. That is now just 2.5% away.
The short term is less clear. SPX has gained 3 weeks in a row; most often, these streaks are followed by a higher high without too much interim give back. Sentiment and volatility data mostly supports further gains.
But, while July is typically a strong month, that strength has often been realized by the end of last week. The rest of the month is usually flat, at best, and seasonality is typically a headwind in August and September. Right now, that tendency is further supported by weakening breadth momentum.
Earning data pushes to the forefront this week: 35% of the companies in the S&P will report their 2Q earnings in the next 5 days. The advanced estimate of 2Q GDP will be released Friday.
US equities rose for a third week in a row this week, although the gains were minor (from alphatrends.net) Enlarge any chart by clicking on it.
The short term is less clear. SPX has gained 3 weeks in a row; most often, these streaks are followed by a higher high without too much interim give back. Sentiment and volatility data mostly supports further gains.
But, while July is typically a strong month, that strength has often been realized by the end of last week. The rest of the month is usually flat, at best, and seasonality is typically a headwind in August and September. Right now, that tendency is further supported by weakening breadth momentum.
Earning data pushes to the forefront this week: 35% of the companies in the S&P will report their 2Q earnings in the next 5 days. The advanced estimate of 2Q GDP will be released Friday.
* * *
US equities rose for a third week in a row this week, although the gains were minor (from alphatrends.net) Enlarge any chart by clicking on it.
Friday, July 20, 2018
The Most Useful Accounts For Finance Twitter: 2018
This week, Bloomberg announced that it is launching a Twitter feed that is optimized for trading, a "real-time feed of curated Twitter data, so that enterprise clients can incorporate the most financially relevant content into their trading algorithms." Read their announcement here.
“Our customers tell us that Twitter data is a vital part of their information-driven trading strategies, helping them uncover early trends and changes in sentiment,” said Tony McManus, Bloomberg Enterprise Data CIO.
“People come to Twitter for breaking news, and this new, real-time Twitter data feed gives finance professionals an increased ability to find meaningful and relevant news with the speed, quality, and accuracy they expect from Bloomberg,” said Bruce Falck, Twitter’s Revenue Product Lead.
If you want to create your own feed of the most useful financial content on Twitter, Jason Goepfert of Sentimentrader has created a list of the 200 most useful accounts (read further here). His list uses data from SparkToro that measures "engagement", i.e., accounts on the most lists whose content generates the most likes, retweets, comments and shares, since these are "more influential, get more visibility, and have more impact."
Here are the top 50, which includes professional traders and investors, financial advisors, fund managers, financial journalists, securities analysts and major news publications.
“Our customers tell us that Twitter data is a vital part of their information-driven trading strategies, helping them uncover early trends and changes in sentiment,” said Tony McManus, Bloomberg Enterprise Data CIO.
“People come to Twitter for breaking news, and this new, real-time Twitter data feed gives finance professionals an increased ability to find meaningful and relevant news with the speed, quality, and accuracy they expect from Bloomberg,” said Bruce Falck, Twitter’s Revenue Product Lead.
If you want to create your own feed of the most useful financial content on Twitter, Jason Goepfert of Sentimentrader has created a list of the 200 most useful accounts (read further here). His list uses data from SparkToro that measures "engagement", i.e., accounts on the most lists whose content generates the most likes, retweets, comments and shares, since these are "more influential, get more visibility, and have more impact."
Here are the top 50, which includes professional traders and investors, financial advisors, fund managers, financial journalists, securities analysts and major news publications.
Thursday, July 19, 2018
Emerging Markets Might Be Ready To Outperform
Summary: Emerging markets equities have lagged in 2018 and throughout most of the last decade. Recent fund outflows have been extreme. Fund managers are underweight the region. Their currencies and commodities are not liked. The region is now "cheap" and it might be ready to outperform.
2018 has been a tough year for emerging market equities. The index is down nearly 8% while the S&P is up more than 5% and US small caps are up 10%. Enlarge any chart by clicking on it.
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2018 has been a tough year for emerging market equities. The index is down nearly 8% while the S&P is up more than 5% and US small caps are up 10%. Enlarge any chart by clicking on it.
Wednesday, July 18, 2018
Fund Managers' Current Asset Allocation - July
Summary: Fund managers came into 2018 very bullish equities, with cash levels at 4-year lows and allocations to global equities at 3-year highs. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.
7 months later, global equity allocations have fallen to the lowest level since the November 2016 election, and cash balances are relatively high. Investors are no longer bullish, although the global equity correction has not made them outright bearish by most measures.
The US has been the best performing region of the world in the past year, yet fund managers have been consistently underweight. That has now changed; in July, US allocations rose to a 17-month high. It's not yet extreme, but a big tailwind behind US outperformance is now gone.
Emerging markets have massively underperformed since April when allocations to the region rose to a 7-year high. In July, allocations fell to the lowest since January 2017. This region is now a modest contrarian long again.
Fund managers' are close to neutral on bonds, but their inflation expectations remain near a 14-year high and their commodity allocations are near an 8-year high. This has previously led US 10-year yields to stagnate or fall.
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and commodities, underweight equities. Enlarge any image by clicking on it.
7 months later, global equity allocations have fallen to the lowest level since the November 2016 election, and cash balances are relatively high. Investors are no longer bullish, although the global equity correction has not made them outright bearish by most measures.
The US has been the best performing region of the world in the past year, yet fund managers have been consistently underweight. That has now changed; in July, US allocations rose to a 17-month high. It's not yet extreme, but a big tailwind behind US outperformance is now gone.
Emerging markets have massively underperformed since April when allocations to the region rose to a 7-year high. In July, allocations fell to the lowest since January 2017. This region is now a modest contrarian long again.
Fund managers' are close to neutral on bonds, but their inflation expectations remain near a 14-year high and their commodity allocations are near an 8-year high. This has previously led US 10-year yields to stagnate or fall.
* * *
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and commodities, underweight equities. Enlarge any image by clicking on it.
Within equities, the US is now overweight while emerging markets in particular are now underweight. This is a significant change from the past year.
A pure contrarian would overweight emerging markets equities relative to the US and underweight cash.
Friday, July 6, 2018
July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
Sunday, July 1, 2018
Weekly Market Summary
Summary: US equities are up three months in a row and positive for the year. Historically, equities have a very strong propensity to end the year higher under these circumstances. That remains our long term view.
Shorter-term, the S&P remains in a 5 month consolidation/trading range. These periods can last 6-12 months. July is a seasonal tailwind, and several sentiment indicators suggest a bias higher (to the top of the range) is warranted. On strength this month, beware; it is followed by the two worst months of the year.
US equities rose for a third month in a row in June. SPX and small caps gained 0.5% and NDX gained 1.1%. The laggard in the US is the Dow, which lost 0.5% in June.
The picture is not much different on YTD basis. At the year's mid-point, SPX is up 2.5%, NDX is up 10% and small caps are up 7%. The Dow is down almost 2%. Part of these results are explained by the upward bias in the dollar, which favors domestic-focused small caps relative to internationally-weighted large caps. Enlarge any chart by clicking on it.
Shorter-term, the S&P remains in a 5 month consolidation/trading range. These periods can last 6-12 months. July is a seasonal tailwind, and several sentiment indicators suggest a bias higher (to the top of the range) is warranted. On strength this month, beware; it is followed by the two worst months of the year.
* * *
US equities rose for a third month in a row in June. SPX and small caps gained 0.5% and NDX gained 1.1%. The laggard in the US is the Dow, which lost 0.5% in June.
The picture is not much different on YTD basis. At the year's mid-point, SPX is up 2.5%, NDX is up 10% and small caps are up 7%. The Dow is down almost 2%. Part of these results are explained by the upward bias in the dollar, which favors domestic-focused small caps relative to internationally-weighted large caps. Enlarge any chart by clicking on it.
Friday, June 29, 2018
The Money Gods' Price For Achieving High Returns
Summary: During their lifetime, most investors will likely endure another decade-long bear market like the ones in the 1970's and 2000's. Younger investors will probably suffer through at least two.
When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.
For all the time spent worrying about bear market risks, the overwhelming majority of short term traders and professional fund managers haven't found a way to avoid it. And if they have, it has been at the expense of also missing out on the gains during bull markets.
If you are going to do better than most, it won't be by continually anticipating a market crash. That has invariably been an exit ramp onto a dead end street. Tuning out noise and consistently following investment rules and hard data is far more challenging than it sounds, but the performance of those that who do it can be in the top 5%, maybe the top 1%.
If you are in your 40's or 50's, you will probably endure another lost decade like the 2000's, where stocks did not appreciate on a net basis. If you are in your 20's or 30's, there's a good chance you will endure at least two such periods in your lifetime.
The future could turn out different than the past, but the pattern over the past 120 years is that expansions alternate with long periods where equity markets churn sideways. That's true even if you include dividends and assume dollar-cost averaging (DCA). The chart below shows the length of time US equities have spent getting back to breakeven from a peak (from Lance Roberts; read his recommended article here). Enlarge any chart by clicking on it.
When thinking about the last 20 years, investors easily recall the tech bubble, the financial crisis and the flash crash in 2010 that together form the most recent lost decade for equities. These negative events dominate our decision making. The (more important) 300% return from equities during this time does not.
For all the time spent worrying about bear market risks, the overwhelming majority of short term traders and professional fund managers haven't found a way to avoid it. And if they have, it has been at the expense of also missing out on the gains during bull markets.
If you are going to do better than most, it won't be by continually anticipating a market crash. That has invariably been an exit ramp onto a dead end street. Tuning out noise and consistently following investment rules and hard data is far more challenging than it sounds, but the performance of those that who do it can be in the top 5%, maybe the top 1%.
* * *
If you are in your 40's or 50's, you will probably endure another lost decade like the 2000's, where stocks did not appreciate on a net basis. If you are in your 20's or 30's, there's a good chance you will endure at least two such periods in your lifetime.
The future could turn out different than the past, but the pattern over the past 120 years is that expansions alternate with long periods where equity markets churn sideways. That's true even if you include dividends and assume dollar-cost averaging (DCA). The chart below shows the length of time US equities have spent getting back to breakeven from a peak (from Lance Roberts; read his recommended article here). Enlarge any chart by clicking on it.
Thursday, June 28, 2018
Interview on Real Vision Television
We were interviewed on Real Vision Television on May 29th. During the interview, we discuss our long term equity market view, the current macro-economic environment and market technicals.
Our thanks to Real Vision for the opportunity to share our thoughts. Click here to become a subscriber.
To watch the interview, click here.
If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.
Our thanks to Real Vision for the opportunity to share our thoughts. Click here to become a subscriber.
To watch the interview, click here.
If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.
Monday, June 11, 2018
Time To Not Freak Out About Debt Again
Summary: Debt is a perennial worry. It's a natural human tendency to think of debt as bad, that by incurring debt we are living beyond our means. But much of what you hear about debt in the US is hyperbole. Here are the facts:
Household debt has fallen in the aftermath of the Great Recession: on a per capita basis, it's back to the same level as 14 years ago. Households' debt relative to their net worth is as low now as in 1985. For all the consternation about the threat posed by student loans, their default rates are actually falling.
Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles. The delinquency rate on corporate loans is lower than at any time during the prior three expansion cycles. High yield spreads are falling and default rates are well below average.
The "tax reform" bill signed in 2017 is forecast to further expand the federal debt. But examples from around the world do not show a strong correlation between federal debt and economic growth over the next 5-10 years. For all the hand wringing about high federal debt, the interest cost of that debt is just 1.3% of GDP, as low as during the halcyon days of Eisenhower and Elvis.
Like most people, you're probably worried about the amount of debt in the US. We seem to be going broke. Enlarge any chart by clicking on it.
Household debt has fallen in the aftermath of the Great Recession: on a per capita basis, it's back to the same level as 14 years ago. Households' debt relative to their net worth is as low now as in 1985. For all the consternation about the threat posed by student loans, their default rates are actually falling.
Corporate leverage today is not materially different than it was in 1993 or 2003, i.e., early in two expansion cycles. The delinquency rate on corporate loans is lower than at any time during the prior three expansion cycles. High yield spreads are falling and default rates are well below average.
The "tax reform" bill signed in 2017 is forecast to further expand the federal debt. But examples from around the world do not show a strong correlation between federal debt and economic growth over the next 5-10 years. For all the hand wringing about high federal debt, the interest cost of that debt is just 1.3% of GDP, as low as during the halcyon days of Eisenhower and Elvis.
* * *
Like most people, you're probably worried about the amount of debt in the US. We seem to be going broke. Enlarge any chart by clicking on it.
Tuesday, June 5, 2018
Weekly Market Summary
Summary: US equities are up two months in a row and positive for the year. They are outperforming the rest of the world, despite ongoing Quantitative Tightening here and QE abroad. In the past few days, the Nasdaq has joined the small cap indices at new all-time highs. With expanding breadth momentum and a solid macro backdrop, the outlook for (still rangebound) large caps is positive.
The upcoming weeks could test investors' resolve. Options expiration, an FOMC rate decision, the DPRK Summit and weak mid-June seasonality are all on deck for next week. The early June gap ups in SPX are very likely to fill.
US equities rose for a second month in a row in May. SPX gained 2.5%, NDX gained 5.7% and small caps gained 6.1%.
Increased volatility has given 2018 has the feel of disappointment, but YTD, SPX is up 2.5% and NDX is up over 11%. Enlarge any chart by clicking on it.
The upcoming weeks could test investors' resolve. Options expiration, an FOMC rate decision, the DPRK Summit and weak mid-June seasonality are all on deck for next week. The early June gap ups in SPX are very likely to fill.
* * *
US equities rose for a second month in a row in May. SPX gained 2.5%, NDX gained 5.7% and small caps gained 6.1%.
Increased volatility has given 2018 has the feel of disappointment, but YTD, SPX is up 2.5% and NDX is up over 11%. Enlarge any chart by clicking on it.
Friday, June 1, 2018
June Macro Update: Unemployment Claims at a 49 Year Low
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 10 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
Friday, May 25, 2018
Separating an Innocuous Correction From the Start of a Sinister Bear Market
Summary: It's true that equities fall before the start of most recessions. So why bother following the economy; why not just follow the price of equities?
"Market corrections" occur every 20 months, but less than a third of these actually becomes a bear market. Recessions almost always lead to bear markets, and bear markets outside of recessions are uncommon. For that reason, discerning whether a recession is imminent can help determine when an innocuous correction is probably the start of a sinister bear market. Volatile equity prices alone are not sufficient.
The future is inherently unknowable. We can never say with certainty what will happen in the month's ahead. But the odds suggest an imminent recession in the US is unlikely at present and, barring a rogue event like 1987, a bear market is not currently underway. That means equities are most likely on their way to new highs in the coming months.
Why bother following the economy? Why not just follow the price of equities?
It's true that equities fall before the start of most recessions. Take the last 50 years as an example. There have been 7 recessions and the S&P has peaked and started to fall ahead of all except one (the S&P peaked with the start of the recession in 1990). On average, the S&P has provided a 7 month "heads up" that a recession is on the way. That's enough for even the slowest investor to get out of the way. Enlarge any chart by clicking on it.
"Market corrections" occur every 20 months, but less than a third of these actually becomes a bear market. Recessions almost always lead to bear markets, and bear markets outside of recessions are uncommon. For that reason, discerning whether a recession is imminent can help determine when an innocuous correction is probably the start of a sinister bear market. Volatile equity prices alone are not sufficient.
* * *
Why bother following the economy? Why not just follow the price of equities?
It's true that equities fall before the start of most recessions. Take the last 50 years as an example. There have been 7 recessions and the S&P has peaked and started to fall ahead of all except one (the S&P peaked with the start of the recession in 1990). On average, the S&P has provided a 7 month "heads up" that a recession is on the way. That's enough for even the slowest investor to get out of the way. Enlarge any chart by clicking on it.
Thursday, May 24, 2018
New Highs In The A-D Line and the Small Cap Index Are Not Necessarily Bullish
Summary: The conventional wisdom is that "healthy breadth" is necessarily bullish. This sounds intuitively correct: a broader foundation - where more stocks are ticking higher - should equal a more solid market, but it is empirically false. Equities can continue to move higher when breadth is healthy, but new highs in the advance-decline line or in the small cap index have also preceded drops of 10, 20 or even 50% in the equity market.
* * *
The conventional wisdom is that "healthy breadth" leads to higher equity prices. This sounds intuitively correct: a broader foundation - where more stocks are ticking higher - should equal a more solid market. Conversely, a narrowing market should be a warning of a likely market top.
But it is empirically false. Consider some recent research into this issue.
The Russell small cap index (RUT) has been making new highs even as the large cap indices have not. Because there are four times as many stocks in RUT as in SPX, many infer that breadth is broadening and that this must be bullish for all equities. "When the troops lead, the generals will follow."
Yet, as Mark Hulbert points out, small caps have peaked after the major stock indices in more than half of the 29 bull markets since 1926. If the conventional wisdom was correct, small caps should lead by peaking before the major indices, but this happened only a third of the time (Mark's article is here).
But it is empirically false. Consider some recent research into this issue.
The Russell small cap index (RUT) has been making new highs even as the large cap indices have not. Because there are four times as many stocks in RUT as in SPX, many infer that breadth is broadening and that this must be bullish for all equities. "When the troops lead, the generals will follow."
Yet, as Mark Hulbert points out, small caps have peaked after the major stock indices in more than half of the 29 bull markets since 1926. If the conventional wisdom was correct, small caps should lead by peaking before the major indices, but this happened only a third of the time (Mark's article is here).
Sunday, May 20, 2018
Weekly Market Summary
Summary: Equities are 2-5% higher so far in May, trying to add to their small gains from April and put behind a rough winter. This week, small caps closed at a new all-time high (ATH) and NDX broke to a 7 week high near its March ATH. This is constructive for the broader market. But new uptrends are defined by persistent strength; it's time for large caps to reveal the true character of this market.
US equities fell slightly last week. SPX and DJIA lost about 0.5%. But May, so far, is tracking positive. Large caps are up 2.5%, tech stocks are up 4% and small caps are up more than 5%. The volatility index, Vix, has been crushed. Enlarge any chart by clicking on it.
* * *
US equities fell slightly last week. SPX and DJIA lost about 0.5%. But May, so far, is tracking positive. Large caps are up 2.5%, tech stocks are up 4% and small caps are up more than 5%. The volatility index, Vix, has been crushed. Enlarge any chart by clicking on it.
Friday, May 18, 2018
Demographics: The Growing Prime Working Age Population
Summary: Demographics is a key driver of economic growth (and, thus, the stock market). Many investors fret over the aging of the Boomer generation.
But the Millennial and Gen X birth cohorts are almost twice as large as the Boomers. Behind the Millennials is Gen Z, a group almost as large as the Boomers. The mid-point of these three generational groups does not enter retirement age until 2055. This prime working age group heavily consumes housing and other goods as they pass through their reproductive and household formation years. "The movement of these younger cohorts into the prime working age is a key economic story in coming years."
Starting around the year 2000, many investors began obsessing over the aging demographic profile in the United States. The concern seemed reasonable. The working age population in Japan had peaked in 1995, 5 years after the Nikkei stock index. The stock market had halved by 2000 as the working population declined (by 13% from 1995 to 2018). Enlarge any chart by clicking on it.
But the Millennial and Gen X birth cohorts are almost twice as large as the Boomers. Behind the Millennials is Gen Z, a group almost as large as the Boomers. The mid-point of these three generational groups does not enter retirement age until 2055. This prime working age group heavily consumes housing and other goods as they pass through their reproductive and household formation years. "The movement of these younger cohorts into the prime working age is a key economic story in coming years."
* * *
Starting around the year 2000, many investors began obsessing over the aging demographic profile in the United States. The concern seemed reasonable. The working age population in Japan had peaked in 1995, 5 years after the Nikkei stock index. The stock market had halved by 2000 as the working population declined (by 13% from 1995 to 2018). Enlarge any chart by clicking on it.
Wednesday, May 16, 2018
Fund Managers' Current Asset Allocation - May
Summary: Fund managers came into 2018 very bullish equities. Cash levels had fallen to the lowest level in 4 years. Allocations to global equities had risen to the highest level in nearly 3 years. Bond allocations were at a 4 year low. Our view at the time was that "this is a headwind to further gains" in equities. That post is here.
Since then, global equity allocations have fallen and cash balances have risen. Investors are no longer at a bullish extreme, although the equity correction has not (yet) made them outright fearful.
In the past 9 months, US equities have outperformed Europe by 6% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should continue to outperform their global peers on a relative basis.
Fund managers' inflation expectations are near a 14 year high; in the past, this has corresponded with a fall in US 10 year yields in the months ahead. Commodity allocations are at a 6 year high.
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets. Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and commodities, underweight bonds and neutral equities. Enlarge any image by clicking on it.
Since then, global equity allocations have fallen and cash balances have risen. Investors are no longer at a bullish extreme, although the equity correction has not (yet) made them outright fearful.
In the past 9 months, US equities have outperformed Europe by 6% and the rest the world by 5%. Despite this, fund managers remain underweight the US. US equities should continue to outperform their global peers on a relative basis.
Fund managers' inflation expectations are near a 14 year high; in the past, this has corresponded with a fall in US 10 year yields in the months ahead. Commodity allocations are at a 6 year high.
* * *
Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets. Our sincere gratitude to BAML for the use of this data.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).
Let's review the highlights from the past month.
Overall: Relative to history, fund managers are overweight cash and commodities, underweight bonds and neutral equities. Enlarge any image by clicking on it.
Within equities, the US is significantly underweight while Europe, Japan and emerging markets are all overweight.
A pure contrarian would overweight US equities relative to Europe and emerging markets and underweight cash.
Tuesday, May 8, 2018
1Q Corporate Results Were Excellent, But Margins May Be Peaking
Summary: Overall, corporate results in the first quarter were very good. S&P sales grew 10%, earnings rose 24% and profit margins expanded to a new all-time high of 11.6%.
Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself.
The outlook in 2018 looks solid right now: the consensus expects earnings to grow 19% this year. Rising energy prices and the new tax reform law are tailwinds.
Expectations for 9% earnings growth in 2019 will probably to be revised downwards; the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest costs rising.
With the correction in equities over the past 3 months, valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been largely worked off. If investors once again become ebullient, there is room for valuations to expand.
84% of the companies in the S&P 500 have released their first quarter (1Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Overall quarterly sales are 10% higher than a year ago, the best sales growth in 6 years (since 2011). On a trailing 12-month basis (TTM), sales are 8% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.
Fundamentals are driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself.
The outlook in 2018 looks solid right now: the consensus expects earnings to grow 19% this year. Rising energy prices and the new tax reform law are tailwinds.
Expectations for 9% earnings growth in 2019 will probably to be revised downwards; the substantial jump in margins this year is unlikely to be sustained, especially with labor and interest costs rising.
With the correction in equities over the past 3 months, valuations are back to their 25-year average. They are not cheap, but the excess from 2017 and early 2018 has been largely worked off. If investors once again become ebullient, there is room for valuations to expand.
* * *
84% of the companies in the S&P 500 have released their first quarter (1Q18) financial reports. The headline numbers are very good. Here are the details:
Sales
Overall quarterly sales are 10% higher than a year ago, the best sales growth in 6 years (since 2011). On a trailing 12-month basis (TTM), sales are 8% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.
Friday, May 4, 2018
May Macro Update: A Recession in 2018 Looks Increasingly Unlikely
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.
Wednesday, May 2, 2018
Trading The "Worst 6 Months" and the Presidential Cycle
Summary: There are two seasonal patterns currently in play for investors: the weak "mid-term election cycle" and the weak "summer months." Is the next half year a landmine for investors? The short answer is no.
Since 1982, the average mid-term year has gained 9%. In fact, mid-term years have been better than the supposedly awesome Year 3 of the presidential cycle more than half the time in the past 36 years.
The same point can be made about summer seasonality. While it's true that returns and the odds of gains are typically lower over the next six months than in winter, seasonality still favors longs. If you sell in May, you should expect to buy back higher in November. For most investors, that's all that matters.
For swing traders, seasonal patterns suggest a general strategy to keep in mind. A swoon in May-June often sets up a bounce higher in July. Likewise, a swoon in August-September often sets up a bounce into October and the end of the year. That also corresponds with the mid-term cycle, which typically has a seasonal low point in September before a ramp into 4Q and into Year 3.
There are two seasonal patterns currently in play for investors: the "mid-term election cycle" and the "summer months." Neither points to negative returns but both point to lower than average returns. There is also some nuance to the patterns that suggest a potential strategy for swing traders to keep in mind.
First, the mid-term election cycle: The second year of a president's term is generally considered the weakest of the four year cycle for stocks. To make matters worse, that seasonal weakness is most pronounced from now until October (red box; from BAML).
Since 1982, the average mid-term year has gained 9%. In fact, mid-term years have been better than the supposedly awesome Year 3 of the presidential cycle more than half the time in the past 36 years.
The same point can be made about summer seasonality. While it's true that returns and the odds of gains are typically lower over the next six months than in winter, seasonality still favors longs. If you sell in May, you should expect to buy back higher in November. For most investors, that's all that matters.
For swing traders, seasonal patterns suggest a general strategy to keep in mind. A swoon in May-June often sets up a bounce higher in July. Likewise, a swoon in August-September often sets up a bounce into October and the end of the year. That also corresponds with the mid-term cycle, which typically has a seasonal low point in September before a ramp into 4Q and into Year 3.
* * *
There are two seasonal patterns currently in play for investors: the "mid-term election cycle" and the "summer months." Neither points to negative returns but both point to lower than average returns. There is also some nuance to the patterns that suggest a potential strategy for swing traders to keep in mind.
First, the mid-term election cycle: The second year of a president's term is generally considered the weakest of the four year cycle for stocks. To make matters worse, that seasonal weakness is most pronounced from now until October (red box; from BAML).
