What could we worry about?
Inflation? This question was posed to me today on “Mornings with Maria’’ hours and hours (!) before the payroll report. It seems that Taco Bell is now paying managers $100K, up from $60K to $80K just a few years ago. “Should we be concerned about wage inflation?” I think Maria asked me. (I lost focus there for a moment, imagining the dream job of enjoying Taco Bell daily along with a fine salary.) Everyone in our business is bullish, and if they’re not, they’re expecting a correction, after which time they’ll be bullish. So then, what could we worry about? With election and geopolitical concerns being hashed and hashed over, the up and coming worry is inflation. It is widely believed that higher wage inflation should drive price inflation. But in fact, the correlation between wage and price inflation has been breaking down. This morning’s jobs report shows slowing wage inflation despite minimum-wage hikes in 23 states and Washington, D.C., last year and another round of hikes this year in 24 states, D.C., and Guam. (Plus Taco Bell.) The Fed and Chair Powell have made clear they’ll require a significant and sustained move up in inflation before raising rates. I’m not worrying about inflation.
Strategas Research surveyed its clients’ opinions of 2020’s biggest market risks. Results, in order: the election, trade and tied for third, inflation/Iran. No mention of earnings, in my opinion this year’s key driver of market returns. Markets are at record highs because earnings are at record highs. Earnings slowed last year against tough year-over-year (y/y) comparisons with 2018, the beneficiary of the massive tax cut. Heading into Q4 reporting next week, y/y S&P 500 earnings are forecast to decline 1.2%. Because earnings almost always are revised higher as reports trickle in, Evercore ISI expects growth of 3% once all the numbers are in. The bigger question is the outlook of CEOs for 2020. A review of Q3 earnings call transcripts found no signs of corporate managers anticipating a decline in profit margins. This favors consensus (and Federated) expectations for a pickup in earnings if global growth perks up as anticipated. Unlike a year ago at this time, no one is talking recession. The global manufacturing PMI (which leads industrial production by two months) turned slightly positive even before the Phase One agreement between China and the U.S., and 2019’s crush of central bank stimulus is about to kick in (swings in interest rates tend to lead economic activity by one to two years). Moreover, central bank balance sheets are expanding again—in the U.S., the money supply’s rising at a 12% annual rate. TIS Group shares that every $100 billion of balance-sheet expansion has translated into 85-90 S&P points. Liquidity trumps whatever is worrying you.
Still, we need something to worry about. Maria’s sidekick just this morning asked me, “Should we be buying at record highs?” That’s something I’m hearing more and more lately from individual investors. Earlier this week in an interview with the Associated Press, the reporter asked, “Shouldn’t we be worried at these levels?” I wish everyone wasn’t so bullish. Sentiment has rapidly shifted from bearish—net long positioning in S&P futures among small traders, a strong contrarian signal, is one example—and equity fund flows have followed suit. December flows into the S&P ETF hit a 2-year high. As extreme sentiment measures grow, Renaissance Macro anticipates an approaching period of elongated consolidation that will allow sentiment and overbought conditions to subside before the market makes its way higher again. Perhaps this will happen, but it would seem premature to call an end to an up-cycle supported by broadening breadth. Slow, steady growth, no recession in sight, low inflation and a Fed at bay. This is what a secular bull looks like. Goldilocks, Maria!
- Goldilocks December nonfarm jobs came in below consensus but were still solid, while ADP private payrolls rose the most in eight months. Wage growth moderated, dipping below 3% y/y for the first time in 1.5 years.
- Services strengthen Institute of Supply Management and Markit surveys of non-manufacturing activity rose in December to 4-month and 5-month highs, respectively, signaling re-acceleration in the largest part of the economy.
- We are a consumer-led economy Bloomberg’s weekly measure of consumer comfort rose again for the seventh time in eight weeks to a 20-year high, supporting continued consumer spending growth.
- Still waiting on capex Although CEO confidence improved slightly in the Conference Board’s fourth-quarter survey, the average remained near 2009 lows, implying capital expenditures (capex) may remain sluggish in the months ahead.
- Peak auto? Despite strong household finances and solid truck sales, overall light vehicle sales fell in December to their lowest annual rate since April. For the year, domestic auto sales hit their lowest level in over a decade, although domestic light truck sales hit new highs and grabbed a near-record 70.7% share of the market.
- Plus, the U.S. is energy independent! There's a difference between higher oil driven by demand and higher oil resulting from geopolitical events. The latter likely has a much lower bar for impacting the economy as the broader issues surrounding geopolitics could negatively impact sentiment far earlier than higher oil prices destroy demand. That said, the U.S. consumer is well positioned to absorb higher oil prices as energy spending is near all-time lows and consumer cash flow is at record highs.
This could save a lot of bubble wrap As machines and materials have gotten less expensive, 3-D printing has become commonplace. Next up: 4-D printing. Yardeni Research reports advances that will allow objects to still be 3-D-printed but delivered flat in an envelope whose components, once exposed to a stimulus like heat, light or water, will pop into shape.
What a time to be alive! Scientists at Carnegie Mellon University have created a machine that looks at brain signals to read your mind with 87% accuracy, while a group of Japanese scientists reportedly is developing machines that can read your mind and turn your thoughts into text messages. Right now, they can decode brain activity to create rough images from people’s thoughts.
Forget smart glasses Venture capital concern Andreessen Horowitz sees smart contacts becoming commonplace by 2030. Put them in, and they will be able to tell you the names of people entering your field of vision and when you last saw them. Scientists already are hard at work on this, according to an article in New Atlas, combining a tiny transparent battery with a mini display.