Easy duty this week (don't tell my boss)
Lots of road warrior travel this week, with stops in nearby Wheeling, W.Va., Boston and Old Greenwich, Conn. But easy duty it was, as I returned to each city for annual presentations to friendly audiences. In Wheeling, an advisor pursued me for a shared photo after my talk. In Boston, three advisors joined to compliment my Gucci shoes. At a lunch stop in White Plains, N.Y., a longtime local colleague of mine remembers a speech I gave more than 20 years ago (!) in which I told the group, “I love to shop. Especially when things are on sale. But regardless, if I like it, I will buy it.” After all these years I still love to shop, and well, sale schmale. (And, walking into my Old Greenwich client event, a guest asked, “Are those new shoes?” I’m tearing up!) The only debate was a gentleman’s insistence in Boston that “There’s no way Warren will win the presidency!” (I heard a lot of talk exactly like this a few years ago...) While the pre-election year historically is the strongest of the four, with an average gain of 16% in the S&P 500 since 1948, uncertainty heading into presidential elections in the fourth year tends to be a headwind until the market identifies the likely winner. And as we noted last week, while Moody’s sees Trump winning re-election rather handily if the economy holds up, the Democratic primary show (with progressives promoting trillion-dollar spending programs and tax increases) and the impeachment show in D.C. are providing ample fodder for markets to ponder.
Speaking of impeachment, with expectations the proceedings could extend past Thanksgiving and into the holiday season, might the deep divide over politics depress American consumers and their spending? Yardeni doesn’t think so. When Americans are happy, we go shopping. When Americans are depressed by the news, we do even more shopping because it releases dopamine in our brains. And online shopping gives us an even stronger dopamine fix than going to the mall, reports Psychology Today, citing a Razorfish report in which high percentages of shoppers the world over expressed more excitement receiving online purchases than buying things in a store. While the nonfarm job growth that has lifted consumer incomes and spirits is moderating, the separate monthly survey of households suggests the labor market is plenty healthy. It’s been trending up for months and tends to catch turning points faster as it is broader than just the establishments in the payroll survey. Sentiment data suggests most consumers have yet to be impacted much, or even care about, the trade war. Not so many retailers such as Walmart and Macy’s that could suffer if the “Phase 1” mini truce doesn’t hold up and a range of tariffs targeting apparel and shoes kicks in. Both warned they’ll have to pass on price increases if the tariffs go ahead, and consumers do care about prices. For now, former Walmart CEO Bill Simon views what he considers the two most reliable predictors of holiday sales, employment and gas prices, to be good even though this will be the shortest possible season as Thanksgiving falls on Nov. 28.
The global economy may be laying the foundation for a strong recovery in 2020 and 2021. German auto sales jumped 23% last month and component suppliers reported strong business. And while China’s auto sales fell 6% in September, component suppliers to the industry report a large recovery in orders since the end of last month. A mild recovery also is being experienced in China’s appliance sector. Strategas Research cites five signs of global cyclical improvement: 1) The German DAX, which hit a 52-week high last week; 2) Consumer Discretionary is starting to outperform Consumer Staples in Europe; 3) Bank stocks are acting better, with JPMorgan taking the lead; 4) U.S. Industrials hit a 52-week relative high vs. the S&P last week; 5) and trucking stocks are breaking out. Underpinning all of this is a stable credit backdrop, accelerating money supply and the re-steepening of the yield curve. Moreover, issues that had been inhibiting the market—the dollar’s rise off its January 2018 bottom, the trade war and ongoing Brexit debate—appear to be fading at exactly the same time the market historically transitions into a long period of seasonality and presidential cyclicality (despite the aforementioned headwinds, only four of 23 election years since 1928 have been down). While Q3 earnings have mildly surprised so far (75% of companies have beat bottom-line estimates), guidance has seen a steady climb in S&P 2020 estimates to around $177. This would put expected earnings-per-share growth at around 8%, much stronger than in 2019—potential fuel for a cyclical rally as we head into the holidays. Of course, I’m always in a mood. Good or bad. Doesn’t matter! Linda needs a new pair of shoes.
- New home sales solid While they dipped slightly in September from August’s post-recession high, it was due to the first decline in year-over-year (y/y) average new home prices in 7.5 years. There were many more low-priced homes sold last month, as affordability issues are improving for middle class families.
- Manufacturing inching up The U.S. Markit manufacturing PMI ticked up again in October on broad-based strength, as new export orders spiked and employment rebounded.
- Contrarian positive At 44%, the percentage of outright bears in last week’s American Association of Individual Investors poll more than doubled the 20% outright bulls. This ratio is similar to the 49% bears to 21% bulls on Dec. 14, 2018, just a trading week before the market bottomed and began a sharp move up.
- More evidence of capex slump Total bank lending declined for the fourth time in six weeks, driven by rapid deterioration in commercial & industrial loans. Since early 2018, they’ve fallen from an extraordinary annual growth rate of more than 14% to now a negative 2%. This reflects a slowdown in capital expenditures (capex)—September capital goods orders fell a second straight month—as businesses put off expansion.
- Existing home sales slip They fell in September by the most in six months as tight supplies caused prices to rise faster than mortgage rates fell. Still, existing sales continue to rise on a y/y basis, with Q3 sales their highest since Q1 2018.
- States slow down The Philly Fed said economic activity rose in 39 states in September, fell in eight and was stable in three, continuing a trend consistent with moderating growth but no recession.
Globalization isn’t dead, it’s reconfiguring Supply chains are shifting away from China—mainly to Asian emerging markets. Cornerstone Macro counts nearly 70 companies that have said they are or are considering moving production away from China since the trade war heated up. Vietnam appears to be the big winner so far, aided by competitive wages, exports similar to China's, low taxes and relative ease of doing business. Interestingly, this shift began well before Trump as China’s competitive edge eroded; the trade war just accelerated it.
It’s a “bearish bull” That’s what Leuthold Group calls this year’s market. It notes that despite healthy double-digit advances in the major indexes and the S&P residing near a record high, investor sentiment has remained as fearful as it’s been 90% of the time over the past 30 years, with defensive investments the leaders across all asset classes.
Oil “bears” are pressing their bets Crude oil futures contracts held short by hedge funds and commodity trading advisors have roughly tripled in the past month, marking only the sixth time since the 2014 crash that short positions make up more than 35% of futures contract held by these market participants. However, unlike most previous cases in which the fast money has built up such a sizable short position, Ned Davis Research notes the underlying fundamental data this time has not deteriorated. In other words, inventories, physical markets, etc., remain healthy and do not support the bearish position these traders have built.