“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman
This month marks the longest economic expansion in U.S. history, surpassing the previous record holder, which was March 1991-March 2001. As many economists have noted, this expansion has been a laggard. Industrial production is up 25.8% since June 2009 through May of this year. That represents only a third of the record post-WWII increase of 75% from February 1961 to December 1969 and well short of the 32% average increase during the previous 11 expansions.
Yardeni Research notes:
“From the second quarter of 2009 through the first quarter of this year the 25% increase in real GDP is the second weakest 10 year performance compared to the previous six 10 year period that started with expansions.”
While the economists have fallen over themselves to predict a recession in every year since 2014, my view on this current expansion remains the same. There has been no boom, and because of that fact the economy has not set itself up for a bust. A point I have made many times in numerous articles. An interesting fact belies the consensus view of this expansion. We have seen a 65% increase in real capital spending, beating two of the previous 10-year periods and this simply destroys the narrative promoted by the naysayers that capital spending in this cycle has been the worst ever.
One last point, I do not have a clue when the next recession will occur, but I can agree with the view posted here that household debt won’t be the cause. So let’s leave this to all of the other experts to tell us when this expansion is over, and what will be the root cause. In the meantime, preparing for that event today may not be the best way to approach the situation.
After posting its best first half since 1997 (up 18%), the S&P added to the gains this week. The past week started out with a downgrade of global equities from Morgan Stanley. The firm basically sees 1% left for its price targets for the S&P 500 (SPY), the iShares Core MSCI Europe ETF (IEUR), the iShares MSCI Emerging Markets ETF (EEM), and Topix Japan.
For the last 2+ years of this bull market, I have been told I’m playing for the last 2%; now I’m being advised I’m trying to squeeze out the last 1%.
For those that like to hang on every word uttered by the Fed, this was their week. While many sat on the edge of their chairs waiting to hear what Fed Chair Powell was going to say at the House Financial Services Committee conference this week, the testimony came and went with no new information. The Fed remains data dependent.
As far as the price action this week, it was the same story as last week. All major indices posted gains. Both the Dow 30 and the Nasdaq joined in the parade of new highs broadening out this U.S. equity rally. Investors can draw their own conclusions, but the price action is not only taking the bear talking points apart one by one, but is also now making their arguments look foolish. That foolish part has been highlighted week after week in the commentary posted here.
Consumer confidence gauges have been pretty mixed, but the weekly Bloomberg Consumer Comfort numbers hit an 18-year high. The Consumer Comfort numbers are much, much stronger than the monthly readings produced by the Conference Board or University of Michigan.
Given that unemployment is low, mortgage rates are low, and consumer balance sheets are the best they have been in a while, there is no surprise here. The consumer is fine.
June CPI showed the second largest month-over-month advance in core prices for the current expansion. CPI rose 0.1% in June, while the core rose 0.3%, hotter than expected. There were no revisions to the 0.1% gains in May. On a 12-month basis, headline prices slowed to a 1.6% y/y pace versus 1.8% y/y, and excluding food and energy, the pace increased to 2.1% y/y versus 2.0% y/y.
June PPI posted gains of 0.1% on the headline and 0.3% on the core, after rising 0.1% and 0.2% respectively, in May. That mirrors the CPI yesterday. On a 12-month basis, the headline slowed to 1.7% y/y versus 1.8% y/y, with the ex-food and energy component steady at 2.3% y/y.
NFIB small business outlook survey fell 1.6% to 103.3 in June, erasing May’s 1.4% increase to 105.0, and breaks a string of four months of gains. Plans to hire declined to 19% from 21%. Expectations for a better economy were unchanged, while expectations for higher sales declined. Expectations for a positive earnings trend also weakened to -7% from -1% and have been in negative territory since September.
The employment picture here in the U.S remains a bright spot.
JOLTS report showed job openings fell 49k to 7,323k in May after dropping 102k to 7,372k in April (revised down from 7,449k). The 7,626k in job openings from November remains the all-time high.
Initial jobless claims dropped 13k to 209k in the July 5 week after falling 7k to 222k in the June 29 week (revised from 221k). That brought the four-week moving average to 219.25k from 222.5k (revised from 222.25k).
Industrial production bounced by 0.9% month over month in May after dropping by 0.4% in April, beating expectations of a 0.2% rebound. On an annualized basis, the factory output dipped by 0.5% in the reported month versus -1.6% expectations.
French manufacturing output surged 1.6% month over month versus 0.3% expected, while Italian manufacturing volumes were up 0.9% versus 0.2% forecast.
Japan machine tool orders continue to crater. Domestic order levels are the lowest since 2013, almost 50% below the April 2018 peak.
Second-quarter earnings season kicked off with Pepsi (PEP) and Delta (DAL) reporting and beating estimates. The real action though will come next week as the major banks and more than 50 other S&P 500 companies will report results. As shown in the chart below, the busiest day of this earnings season will be on 7/25 when 61 S&P 500 companies are scheduled to report.
The busiest week for earnings will be the following week when a total of 160 companies will be reporting. After that things will quickly start to die down in August.
Start preparing yourself for the usual narrative of “heads we lose and tails we lose”. If earnings DO NOT beat estimates, it will be of course viewed as bearish. If earnings DO beat estimates, it will be because the bar has been set low and will be viewed as bearish. In the meantime, understand that unless earnings are awful, the recent price action in the stock market has discounted this season and is looking out to the end of 2019.
FactSet Research weekly update:
For Q2 2019:
“The S&P 500 is expected to report a decline in earnings of -2.7% for the second quarter. Over the past five years on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.8%. During this same period, 72% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 3.7 percentage points on average (over the past 5 years) due to the number and magnitude of upside earnings surprises.”
“If this average increase is applied to the estimated earnings decline at the end of Q2 (June 30) of -2.7%, the actual earnings growth rate for the quarter would be 1.0% (-2.7% + 3.7% = 1.0%).”
Fed Chair Jerome Powell testified before Congress this past week, and it was more of same from members. They talk their personal agendas and reveal very little about anything else.
Minutes from the last Federal Reserve meeting:
“The increased uncertainty and shift to downside risks around the projection reflected the staff’s assessment that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed. With the risks to the forecast for economic activity tilted to the downside, the risks to the inflation projection were also viewed as having a downward skew.”
“Participants widely noted that the global developments that led to the heightened uncertainties about the economic outlook were quite recent. Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook. Participants stated a variety of reasons that would call for a lower path of the federal funds rate. Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective.”
As noted last week, one reason the Fed may cut is that inflation pressures remain almost nonexistent. While one month does not make a trend, it is interesting that June CPI showed the second largest month-over-month advance in core prices for the current expansion. Perhaps patience may once again be the correct move before any decision on interest rates is made.
Far too much emphasis is being placed on the Fed these days. Investors are myopically focused on what the Fed will do next. The consensus says that if the Fed does NOT cut rates this month, the stock market will begin to fall apart. While there could be a knee-jerk reaction from traders, I’m not in that camp. I simply do not believe global institutional money managers are putting money to work here because they see the Fed Funds rate 0.25% lower in the next month or so.
If there is a sell-off, it just might be due to the fact that equities are at new highs. The index has risen 27% off the lows while suffering only on 6% pullback along the way.
However, if the Fed does decide to cut rates this month, there is historical precedent for a rate cut with stocks near an all-time high. Ironically that occurred in the last secular bull market in July of 1995. The S&P went on to post massive gains until the Tech Bubble in 2000.
There is historical precedent for a rate cut with stocks near an all-time high. Ironically that that occurred in the last secular bull market in July of 1995. The S&P went on to post massive gains until the Tech Bubble in 2000.
The 3-month/10-year Treasury curve inverted four weeks ago and that curve remains inverted. However, the gap has now been cut to 2 basis points. At the close of business this week, the 3-month/10-year has been inverted for 39 days. Take the following for what it is worth. Historically, an inversion in the curve has an 18- to 24-month lead time before recession. Furthermore in that period of time, stocks have done quite well. The 2-year/10-year has yet to invert.
The 2-10 spread started the year at 16 basis points; it stands at 28 basis points today.
The S&P 500 and Dow have made new all-time highs, but sentiment remains subdued. AAII’s weekly sentiment survey showed 33.6% of those surveyed are bullish, up 0.5% from last week. This is in the lower range of sentiment readings given the new highs in the market. Bespoke Investment Group notes:
“At this level, bullish sentiment is in the 15th percentile of times that the S&P 500 has reached a new all-time high in the past week. Additionally, the current reading is still below the historical average for bullish sentiment as it has been for nine straight weeks now. That is the longest such streak since the 12-week streak ending May 17th of last year.”
Week after week bullish sentiment remains below norms. Fund flows show money leaving stocks at record rates.
“The past 4 weeks have now seen -$23.4b outflow from equity mutual funds and ETFs the past 4 weeks. That includes a massive -$19.8b last week. So far this year, a net outflow of -$97.8b.”
The graphic above shows how equity fund flows are now at levels that are points where rallies take place. The Twitter post below adds more confirmation that while the stock market is making a new high, market participants are leaving the market.
It’s always been my view that many retail investors are simply afraid to be in this market. Now we see confirmation as TD Ameritrade clients reduced their equity exposure again in June.
The trend has been down since 2017 and now matches levels last seen in 2015. Not only have some lightened up on equity exposure, but they may also have compounded that mistake by piling into “short only” equity funds as shown in the chart below.
All of this is taking place as the S&P marches to new highs. Confirmation that not many believe in this bull market.
WTI closed the week at $60.28, up $2.72 for the week. The first close above the $60 level since May 22.
The weekly inventory report showed a draw of 9.5 million barrels. That brings the three-week draw to 22+ million barrels. At 459 million barrels, U.S. crude oil inventories are now about 4% above the five-year average for this time of year. Total motor gasoline inventories decreased by 1.5 million barrels last week and are at the five-year average for this time of year.
This week marked the fifth straight week of gasoline inventories declining as demand picked back up, which is out of line with seasonal patterns.
The Technical Picture
The cautious, outright negative views persist. Looking out to the second half, the general consensus is factoring in a decent pullback for stocks.
When the S&P first made new highs, many viewed the lack of participation in the other indices as a negative. Sometimes it is better to be patient than jump to a conclusion. Both the Dow and the Nasdaq made new closing highs this week as well.
Chart courtesy of FreeStockCharts.com
S&P 3,000 is here; very few expected that to occur in 2019. Investors need to learn how the stock market “works”. Worrying about every headline has investors running for the exits. Debating what the Fed is going to do, what China is or isn’t saying regarding tariffs, and looking for any crack in the technical picture to reinforce incorrect assumptions has been proven to be an incorrect approach.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from overall performance.
Amazon (NASDAQ:AMZN) confirms plans to train 100,000 workers in new skills. The company pledged to upskill 100,000 of its employees across the United States, dedicating over $700M to provide people across its corporate offices, tech hubs, fulfillment centers, retail stores, and transportation network with access to training programs that will help them move into more highly skilled roles within or outside of Amazon.
Those that continue to bring up the dastardly deeds that these companies are accused of might want to focus on the ENTIRE picture. The self-proclaimed experts might also want to move on with the “targeting” of the wealthy. After all it is these wealthy entrepreneurs that put these positive plans in motion.
On the flip side, Bloomberg reported that the U.S. plans to investigate French plan to tax U.S. tech giants. The White House is set to give U.S. Trade Representative Robert Lighthizer up to a year to investigate whether France’s digital-tax plan would hurt U.S. technology firms. Perhaps Mr. Lighthizer can expand his investigation to include the individuals located here in the U.S. that seem to believe attacking big tech is a good idea.
This post on Twitter caught my attention.
Jason goes on to describe this misguided effort by folks looking to score points in the political arena.
Yet another fact to kill this notion that stock buybacks are the primary reason for this Bull market.
“The impact of buybacks has been greatly exaggerated. On balance, buybacks reduced the share count of the S&P by only 8% from Q1 2011 through Q1 2019, or an average of 1% per year. That’s because it found that roughly two-thirds of buybacks may be mostly offsetting stocks issued as labor compensation.”
Remember all of the consternation over margin debt and how it was a dire stock market warning? That boogeyman was first introduced to investors back in 2013.
So if the analysts want to warn the bulls about how bad margin debt is when it is high, here is a warning to the bears as margin debt plummets.
Individual Stocks and Sectors
“Growth stocks prosper with a dovish Fed. Growth has outperformed 80% of the time in the six and 12 months following an initial Fed rate cut, shares. It notes the P/E ratio of growth vs. value stocks is 0.8 standard deviations above its norm, with the absolute P/E of U.S. growth stocks at 27 vs. 45-60 seen at the end of most bull markets. Meanwhile, the value side of the equity market has rarely been so disrupted. Price momentum is extreme, but historically, growth as a style has continued to outperform from current levels 85% of the time.”
The backdrop is one where “narratives” such as the U.S.-China trade war, and not fundamental economic variables, have emerged as the largest driver of volatility. Investor sentiment has dipped to historically low levels and equity fund flows remain negative despite new market highs. The average investor can hardly make sense of what is going on these days as they watch major indices make new all-time highs in a backdrop they view as negative.
It seems to me that many have no idea of how stock markets “work”. One example, market participants do not use investor sentiment when forging their equity market strategy. It’s usually headline-grabbing details like trade tariffs and the next move by the Fed that drive short- and intermediate-term strategies. Human emotion brings out the herd mentality. Everyone lies up on one side of the boat; that is how stock market “bubbles” are born, and many are very quick to point out the disaster a euphoric backdrop can bring.
Ironically, not many use that same premise as a guide when everyone is negative. Looking at the data, there is little doubt in what is going on. The average retail investor remains frightened of this stock market.
Emotion and herd behavior are always present on the investment scene, and what we have learned throughout history is the consensus view on ANYTHING is usually wrong. We all know what happens when everyone rushes to the same side of the boat.
In addition to all of the other data points and signals the stock market puts forth, sentiment data should be right up there when making decisions. Case in point, after pouring through all of the evidence in 2015/2016, the poor sentiment that was pervasive back then was the tiebreaker that had me convinced the bull market was not over.
Markets do not top when everyone around me is trumpeting warnings. Today it is more of the same, and now we see actions speaking louder than words. Investors are cautious and pulling money out of stocks. Not many were convinced stocks were in fact going to go higher.
When I first mentioned this next point back in January, it was met with criticism and labeled the ramblings of a perma bull.
“We define a bear market as any move of 20% or more from a closing high to a closing low, so based on that definition, last year’s Q4 decline of 19.8% was close but not quite a bear market (the 20% threshold was reached on an intraday basis).”
There was a reason for that minor difference to be noteworthy. There have been a number of instances in the last 50 years where the S&P 500 saw similar “near-bear” markets with declines of 19%+, but not 20%.
Bespoke Investment Group notes:
“In the six months that followed the five prior ‘near-bear’ markets, the S&P 500 saw an average gain of 23.5% and a median gain of 27.8%. Notably, the S&P 500’s performance in the six months that followed the 12/24 low is actually weaker than three of the five prior ‘near-bear’ market lows!”
“While the S&P 500’s performance in the first six months off a ‘near-bear’ market low has been impressive, returns in the next six months have been less robust. Of the five prior periods shown, the nine month return was lower than the six-month return three times. Looking further out, though, returns one year later were higher than the nine month return in all five periods.”
Ramblings of a perma bull or looking at all of the data to form a conclusion? What we do know; the advice here was not to leave the bull market back in December 2018 when the majority of pundits called the bull market over. The S&P is at 3,000+, the Dow at 27,000+, and the Nasdaq Composite 8,000+.
In contrast, the whipsaw forecasts forged week after week demonstrate many have no idea how stock markets “work”.
Stay the course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to All!
On April 10th Savvy Investors were advised to; “Get prepared for a march to S&P 3000.”
May 23rd; Despite the negative sentiment amidst a market selloff, the message that Savvy Investors received; “I do not believe we have seen the top, more highs could very well be ahead.”
June 6th; subscribers to my marketplace service were advised; “The Selling Stampede Is Over. Looking For This Bounce To Be Sustained.”
There is no “spin” here, all of those comments are well documented. Please consider joining, and following someone that continues to have the “story” correct. Lock in a great rate now.
Disclosure: I am/we are long EVERY STOCK/ETF IN ALL OF THE SAVVY PORTFOLIOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.