Households' Equity Ownership Reaches 30%. It's Statistical Noise

Summary: Households have 30% of their financial assets in equities, the same proportion as they held at bull market peaks in the 1960s and in 2007. Does this mean another bear market is imminent? No. Two of the last three times the purportedly significant 30% level has been reached, stocks gained another 40-60%. The level is statistical noise.

Households' equity ownership proportion mostly reflects the appreciation in the stock market: their equity proportion fell almost in half in the last bear market yet during this time, investors actually added new money to equity funds. The level of households' assets in equities seems to closely predict high and lows in the stock market because they both measure the exact same thing: the level of the stock market.

There are better ways to measure investor sentiment and valuations, both of which, like the equity proportion, rise during bull markets and fall during bear markets.

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Chances are you have seen a chart like the one below. It shows US households' equity ownership as a proportion of total household financial assets (blue line) versus the stock market (red line).  The message is usually this: US households now own more equity than at the stock market peak in 2007. It's a sign that another bear market is imminent. Enlarge any chart by clicking on it.

The Set Up As The FOMC Get Ready For A Third Rate Hike

Summary: The FOMC is likely to enact a third hike in the federal funds rate this week. With economic data continuing to be good, the risk to equities of a rate hike is small. Higher rates indicate continued economic growth, so equities, commodities, the dollar and yields generally respond positively. However, the recent picture is more mixed: in particular, the dollar and yields have sold off after rates have been hiked. This was not the consensus' expectation, nor is it this time. Is another surprise likely now?

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On Wednesday March 15, the FOMC is likely to raise the federal funds rate (FFR) for the third time during the current economic expansion. We wrote about what to expect ahead of the first rate hike here and the second rate hike here.

The Fed chair and its governors have very clearly signaled their intentions in advance of this meeting. The market places the probability of rate hike at over 90%. In just over a week, 10 year treasury yields have jumped 30 basis points (bp) to their highest level since December 15.

Why has the Fed telegraphed their intentions to the market so clearly? Doesn't this tie the FOMC's hands should interim data make a FFR hike unnecessary?

The FOMC has learned that surprising the market with a FFR hike is a very bad idea. With the SPX rising 15% since the election, a surprise would likely catalyze a big drop. Here are two examples of how this has happened in the past.

The 1966 bear market is one of only two bear markets since the 1940s that occurred outside of a recession. The approximate cause: the FFR was rapidly and unexpectedly raised from 4% to 6% (read more here).

More recently, the FOMC surprised the market with just a 25 bp FFR hike in February 1994. Going into the meeting, the market put only a 20% probability of a hike. What happened next? The SPX fell 10% in the next two months. So keeping the market constantly prepared for a possible change in the FFR has been the FOMC's modus operandi for a long time.

March Macro Update: Housing Sales and Starts Rebound

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 has 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 may be beginning.

That leaves employment growth has the main watch out: employment growth is 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.

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

• Monthly employment gains have averaged 196,000 during the past year, with annual growth of 1.6% yoy.  Full-time employment is leading.
• Recent compensation growth is the highest in nearly 8 years: 2.8% yoy in February. 
• Most measures of demand show 3-4% nominal growth. Real personal consumption growth in January was 2.8%.  Real retail sales grew 2.9% yoy in January.
• Housing sales grew 6% yoy in January. Starts grew 10% 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 2.2% yoy in January. It was weak during the winter of 2015 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 0.5% yoy in January.

Prior macro posts are here.

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Our key message over the past 4 years has been that (a) growth is positive but slow, in the range of ~3-4% (nominal), 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 February non-farm payroll was 235,000 new employees plus 9,000 in revisions.  In the past 12 months, the average monthly gain in employment was 196,000. Employment remains solid.

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 prints of 84,000 in March 2015 and 24,000 in May 2016 fit the historical pattern. This is normal, not unusual or unexpected.

Nominated: Best Financial Blog of 2016

We are truly honored to have been nominated as one of the best financial blogs of 2016. The award will be given out in New York City on March 30th as part of Stocktoberfest East. The ceremony will be hosted by Josh Brown and Howard Lindzon. More information can be found here.

The Similarities (and Key Differences) Between 2017 and 2013 So Far

Summary: 2017 is off to a remarkably similar start to 2013. No two years are ever exactly the same, so there's no reason to suggest that 2017 will repeat the 30% gains achieved in 2013. But many of the technical and fundamental similarities between these years suggest that 2017 may continue to be a good year.

There are two watch outs, however, that make 2017 much higher risk than 2013. It's also worth recalling that equities fell 3-8% at six different points in 2013. Expecting 2017 to continue to ride smoothly higher will probably prove to be a mistake.

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2017 is off to a remarkably similar start to 2013. Is it set to be a repeat of that year? It's an important question as stocks gained about 30% in 2013.

Consider some of the following:

2017, like 2013, is the first year in a new Presidential term.

Both years got off to a fast start. By March, SPX had gained 8% in both 2013 and 2017.

Both years started by making a string of new all-time highs (ATHs). By the end of February, the Dow Industrials had closed at a new ATH 12 days in a row. A similarly rare streak of 10 days took place by March 2013.

SPX is often weak in February. But the index gained in both January and February in 2013 and 2017. In the other instances that this has happened since 1945, SPX closed up for the full year every time by an average of 24% (more on this here).

Both 2013 and 2017 came on the heels of long, volatile periods. SPX dropped 20% in 2011 and started 2013 only  2% higher than 18 months earlier. Similarly, SPX dropped 16% in 2016 and started 2017 only 5% higher than 18 months earlier. In both years, a dip at the election in November caused the market to be oversold; in both years, the market was significantly overbought by March (top panel).