April Macro Update: Markets Might Be Wobbly But The Economy Is Fine

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.

Interview With Financial Sense on What To Look For Ahead of an Equity Market Peak

We were interviewed by Cris Sheridan of Financial Sense on March 13th. During the interview we discuss the macro-economic environment, the housing market, current market technicals and the financial performance of US companies. One theme of our discussion is what to look for ahead of the next bear market in US equities. Another theme is a potentially bullish set up for US treasuries 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.

March Macro Update: Nine Years Into the Recovery, 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 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.

February Macro Update: Employee Compensation Rises To A 9 Year High

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.

January Macro Update: Home Sales, Retail Sales and Manufacturing Surge Higher

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 last into late 2018 at a minimum. Enlarge any image by clicking on it.

December Macro Update: Housing and Manufacturing Growth At Multi-Year Highs

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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

The Flattening Yield Curve Is Not A Threat to US Equities

Summary:  On its own, a flattening yield curve is not an imminent threat to US equities. Under similar circumstances over the past 40 years, the S&P has continued to rise and a recession has been a year or more in the future. Investors should expect the yield curve to flatten further in the months ahead.

* * *

Investors are concerned about the flattening yield curve. Enlarge any image by clicking on it.

Path To Higher Yields In 2018 Unlikely To Be Straight Forward

Summary:  Macro economic data is good. It seems likely that rates will be higher in a year and that suggests treasury yields will also be higher than they are now. But the path between here and higher yields is unlikely to be as straight-forward as is currently believed.

* * *

Recent macro economic data in the US has been very good. In just the past month, retail sales have risen to new all-time highs, new home sales have risen to a new 10 year high and unemployment claims have fallen to more than a 40 year low. Last month, manufacturing notched an annual growth rate of 2.7%, the highest rate in over 3 years.

It would be sensible, therefore, to expect the Federal Reserve to raise its funds rate at its December 13th meeting; in fact, the implied probability of this is now close to 100%. Three further rate hikes are also expected in 2018.

Under this backdrop, investors would logically expect treasury yields to also rise.

That might well be the case, but the path is unlikely to be that straight forward.

Consider, first, that the Fed has already raised its funds rate 4 times in the past 2 years. Treasury yields were lower several weeks later every time. Enlarge any image by clicking on it.

November 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 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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

The End of QE Didn't Kill The Bull Market. The Start of QT Won't Either

Summary:  Quantitative Easing (QE) ended 3 years ago today. This was widely expected to mark the end to the bull market (post). Instead, US stocks have risen another 37%.

Why was this view wrong? In truth, the narrative about the Fed's policy has shifted over time as equities have risen. As late as 2012, QE was viewed as bearish. Into 2014, it was only the continued QE inflows that were considered bullish. When stocks kept rising after QE ended, the narrative shifted to the large Fed "balance sheet" and then to global central bank actions.

The Fed's policies have clearly led US equities higher, but not in the way that it has been popularly perceived. The Fed established the conditions for fundamental growth in consumption, investment, employment and corporate profits, creating the confidence in investors to place their cash into the financial markets. All of these factors have a strong causal relationship to share price that long pre-date 2009 and the QE programs.

The Fed will now embark on a reduction of its balance sheet (QT). This appears to be the most pivotal event facing markets in 2018. But it stands to reason that so long as the positive fundamental conditions continue, US equities can be expected to remain firm.

None of this implies that the US equity market will continue to appreciate without any interim drama. As noted in the charts that follow, investor sentiment is very bullish and equity valuations are very high. Since 1980, it has been normal for the S&P to correct by an average of 10% during the course of each year of a bull market. With the last correction of that magnitude starting 2 years ago, one of that magnitude, or larger, is arguably overdue in the coming months. That, not the tapering of the Fed's balance sheet, is the relevant risk for investors to focus on in 2018.

* * *

On September 20th, the Fed formally announced that it will begin to reduce its balance sheet, primarily by ceasing reinvestment from maturing bonds. This process is being termed "Quantitative Tightening" (QT) as it is the reverse of the bond buying program known as Quantitative Easing (QE).

QT will begin slowly, with a reduction of just $10b per month during the first 3 months. If there are no major market disruptions, then the pace of QT will be increased by $10b per month every quarter. To put that in perspective, $10b equals 0.2% of the Fed's total assets. By the end of the year, the Fed's balance sheet will have been reduced by less than 1% (from JPM). Enlarge any image by clicking on it.

October Macro Update: Hurricanes End 83-Month Employment Expansion

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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

September Macro Update: Employment Growth Slows Further

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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

Interview With Financial Sense on Identifying the Next Bear Market

We were interviewed by Cris Sheridan of Financial Sense on August 24th. During the interview we discuss current market technicals, the macro-economic environment, the investor sentiment backdrop and the prospect for future equity returns. One theme of our discussion is what to look for ahead of a bear market in US equities. Another theme is how the current period of low volatility will likely resolve.

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.

August Macro Update: Slowing Growth in Employment and Consumption

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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

July 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 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 last well into 2018 at a minimum. Enlarge any image by clicking on it.

Higher Environmental Standards Are Not Killing Jobs or Economic Growth

Summary: Higher environmental standards are being blamed for job losses in mining and manufacturing. A few months ago, foreign trade was to blame. Both reasons are wrong: 80% of these job losses are due to new technologies, not trade or environmental standards.

It's hard to argue that reducing carbon emissions has been economically harmful: the US is in the midst of its longest streak of jobs growth in its history. Coal employment fell 75% in the 20 years before the Environmental Protection Agency was even founded. Solar jobs are now 3 times greater than coal jobs, and growing fast. Cities like Pittsburgh have shed manufacturing jobs but gained three times as many "new economy" jobs in healthcare and technology. For these reasons, many Fortune 500 companies - including Exxon-Mobil, Chevron and Conoco - support efforts to curb emissions. American voters support the Paris Agreement by a wide 5:1 margin.

It's true that China is the world's largest source of annual CO2 emissions and home to many of Earth's most polluted cities. But China's emissions are overwhelmingly a function of its enormous size and its booming exports to the rest of the world. On a consumption basis, China's emissions are 20% more than the US but its population is 330% larger.  About 30% of China's emissions are due to consumption in the US and elsewhere.

The uncomfortable truth is that the US and the EU are the largest polluters in history. They are responsible for well over half the cumulative buildup of greenhouse gases in the atmosphere. The consumer habits of the average American creates emissions that are twice that of the average European, nearly 4 times that of the average Chinese and 18 times that of the average Indian.

* * *

Higher environmental standards are being blamed for job losses in mining and manufacturing. A few months ago, foreign trade was to blame. Both reasons are wrong: 80% of job losses in these areas are due to new technologies (article). We discussed this in a recent post here.

It's hard to argue that reducing emissions in the US has been economically harmful: regulations are far more stringent now than at any other time yet the US is in the midst of its longest streak of jobs growth - 79 straight months - in its history. The current economic expansion is the 3rd longest in history. Enlarge any chart by clicking on it.

June Macro Update: Employment, Retail Sales and Housing Soft

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.

One concern in recent months had been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth appears to be starting. That said, housing starts grew only 1% in the past year. Permits are up only 2%. This data bears following closely.

That leaves two watch outs. The first is employment growth, which has been decelerating from over 2% last year to 1.6% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.

The second watch out is demand growth. Real retail sales excluding gas is in a decelerating trend. In April, growth was just 1.6% after having grown at more than 4% in 2015. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.

Overall, the main positives from the recent data are in employment, consumption growth and housing:

• Monthly employment gains have averaged 186,000 during the past year, with annual growth of 1.6% yoy.  Full-time employment is leading.
• Recent compensation growth is among the highest in the past 8 years: 2.6% yoy in 1Q17. 
• Most measures of demand show 2-3% real growth. Real personal consumption growth in April was 2.6%.  Real retail sales (including gas) grew 2.2% yoy in April, making a new ATH.
• Housing sales made a 9-1/2 high in March. Sales grew 1% yoy in April. Starts grew 1% over the past year.
• The core inflation rate is ticking higher but remains near the Fed's 2% target.

The main negatives have been concentrated in the manufacturing sector (which accounts for less than 10% of employment). Note, however, that recent data shows an improvement in manufacturing:

• Core durable goods growth rose 6.0% yoy in April. It was weak during the winter of 2015-16 but has rebounded in recent months. 
• Industrial production rose 2.2% in April, helped by the rebound in mining (oil/gas extraction). The manufacturing component grew 1.9% yoy in April.

Prior macro posts are here.

* * *

Our key message over the past 5 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes. Enlarge any image by clicking on it.

A valuable post on using macro data to improve trend following investment strategies can be found here.

Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.


Employment and Wages

The May non-farm payroll was 138,000 new employees minus 66,000 in revisions.  In the past 12 months, the average monthly gain in employment was 186,000. Employment growth is decelerating.

Monthly NFP prints are normally volatile. Since the 1990s, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 50,000 this March, 86,000 in March 2015 and 43,000 in May 2016 fit the historical pattern. This is normal, not unusual or unexpected.

May Macro Update: Two Watch Outs Are Retail Sales And Employment Growth

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.

One concern in recent months had been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth appears to be starting.

That leaves two watch outs. The first is employment growth, which has been decelerating from over 2% last year to 1.6% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.

The second watch out is demand growth. Real retail sales excluding gas is in a decelerating trend. In March, growth was just 2.0% after having grown at more than 4% in 2015. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.

Overall, the main positives from the recent data are in employment, consumption growth and housing:

• Monthly employment gains have averaged 187,000 during the past year, with annual growth of 1.6% yoy.  Full-time employment is leading.
• Recent compensation growth is among the highest in the past 8 years: 2.6% yoy in 1Q17. 
• Most measures of demand show 2-3% real growth. Real personal consumption growth in 1Q17 was 2.8%.  Real retail sales (including gas) grew 2.7% yoy in March.
• Housing sales grew 16% yoy in March. Starts grew 9% over the past year.
• The core inflation rate is ticking higher but remains near the Fed's 2% target.

The main negatives have been concentrated in the manufacturing sector (which accounts for less than 10% of employment). Note, however, that recent data shows an improvement in manufacturing:

• Core durable goods growth rose 6.4% yoy in March. It was weak during the winter of 2015-16 but has slowly rebounded in recent months. 
• Industrial production rose 1.5% in March, helped by the rebound in mining (oil/gas extraction). The manufacturing component grew 1.0% yoy in March.

Prior macro posts are here.

* * *

Our key message over the past 5 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes. Enlarge any image by clicking on it.

A valuable post on using macro data to improve trend following investment strategies can be found here.

Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.


Employment and Wages

The April non-farm payroll was 211,000 new employees minus 6,000 in revisions.  In the past 12 months, the average monthly gain in employment was 187,000. Employment growth is decelerating.

Monthly NFP prints are normally volatile. Since the 1990s, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 79,000 last month, 84,000 in March 2015 and 24,000 in May 2016 fit the historical pattern. This is normal, not unusual or unexpected.

April Macro Update: Employment Growth Continues to Decelerate

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.

One concern in recent months had been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth appears to be starting.

That leaves employment growth as the main watch out: employment growth is decelerating, from over 2% last year to 1.5% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.

A second watch out is demand growth. Real retail sales excluding gas is in a decelerating trend. In February, growth was just 1.8%. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.

Overall, the main positives from the recent data are in employment, consumption growth and housing:

• Monthly employment gains have averaged 178,000 during the past year, with annual growth of 1.5% yoy.  Full-time employment is leading.
• Recent compensation growth is among the highest in the past 8 years: 2.7% yoy in March. 
• Most measures of demand show 2-3% real growth. Real personal consumption growth in February was 2.6%.  Real retail sales (including gas) grew 2.8% yoy in February.
• Housing sales grew 13% yoy in February. Starts grew 6% over the past year.
• The core inflation rate is ticking higher but remains near the Fed's 2% target.

The main negatives are concentrated in the manufacturing sector (which accounts for less than 10% of employment):

• Core durable goods growth rose 3.4% yoy in February. It was weak during the winter of 2015-16 and is slowly rebounding in recent months. 
• Industrial production has also been weak; it's flat yoy due to weakness in mining (oil and coal). The manufacturing component grew 1.4% yoy in February.

Prior macro posts are here.

* * *

Our key message over the past 4 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes (enlarge any image by clicking on it).

A valuable post on using macro data to improve trend following investment strategies can be found here.

Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing.


Employment and Wages

The March non-farm payroll was 98,000 new employees minus 38,000 in revisions.  In the past 12 months, the average monthly gain in employment was 178,000. Employment growth is decelerating.

Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 98,000 this month, 84,000 in March 2015 and 24,000 in May 2016 fit the historical pattern. This is normal, not unusual or unexpected.

Interview With Financial Sense on Identifying an Equity Market Top

We were interviewed by Cris Sheridan of Financial Sense on March 28. During the interview, we discuss current market technicals, the macro-economic environment, the investor sentiment backdrop and the prospect for future equity returns. The theme of our discussion is what to look for at an equity market top.

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.