Paulsen's Perspective
Will Stimulus “Strike Out”?
Many increasingly fear the global economic recovery is in severe peril because overused economic policies have become futile. Bloated central bank balance sheets, large fiscal budgetary fiascos, and the unprecedented global phenomenon of widespread negative bond yields leaves an impression that economic help is spent!
Positive Economic Surprises With... ANGUISH!
The stock market is re-testing its August 5th collapse low, the U.S. 10-year bond yield is nearing its lows of this recovery, yet another yield curve inversion (tens vs. twos) was breached this week, silence from the Federal Reserve, negative yielding global debt now totaling more than $15 trillion, an escalating riot in Hong Kong, and trade-war negotiations hanging by a thread as ongoing communications are now only by phone! Whew, it’s tough being a bull. Maybe foolhardy?
Investment Bifurcation
Adding to current anxieties are the growing fears that businesses may be curtailing spending plans. Real nonresidential investment spending declined in the second quarter for the first time since early 2016. However, this decline was due entirely to ‘old-era investment spending’ while ‘new-era spending’ remains healthy.
Conflicting Counsel?
This is why financial market prognostications are so difficult and why some believe fruitless! Currently, two recession indicators – both with equally impressive accurate historical prowess – are giving entirely contradictory signals? As shown by the accompanying charts, the yield curve has inverted while fiscal stimulus has been expanding. At least since 1965, this has ‘never’ happened.
Show Me The Money!
Despite the current drama, the stock market will not likely be sustainably driven by the Federal Reserve, ongoing trade negotiations, or by presidential politics. Although these spectacles will continue to bounce the market around, ultimately, its direction will most likely be tied to corporate earnings.
Try To Relax, Policy Uncertainty Is UP And This Is Good For Stocks?
Whew, what a week! Confusion reigned surrounding monetary policy on Wednesday after Chairman Powell’s press conference, and then trade policy uncertainty surged on Thursday when President Trump announced new tariffs on Chinese goods
The BH Ratio (not to be confused with the BS Ratio?)
Despite a widespread impression that business confidence is declining under the weight of ongoing global uncertainties, it was reported yesterday that, after being flat for almost a year, new orders for nondefense ex-air capital goods (core business capital goods spending) rose to a new recovery high in June.
Putting Humpty Together Again?
When Humpty Dumpty fell from the wall, all the king's horses and all the king's men could not put Humpty together again.
Some Optimism For Earnings?
Little is expected from the current earnings season. At best, corporate profits may eke out a small gain compared to last year’s second quarter. Moreover, with Trump’s trade war still threatening to worsen, the yield curve still inverted, and because the U.S. economy is now in the longest expansion in its history, many are understandably worried that earnings growth may remain challenging.
A Dollar Downgrade?
As shown in Chart 1, since 2015, the trade-weighted U.S. Dollar index has generally ranged between 90 and 100. Its recent stability, at a level much higher than it was during the first half of this economic recovery, has played an important role in shaping the economic and financial-market landscape.
A Picture Is Worth 1,000 Words ... and it was a holiday week and I felt lazy
There is still plenty to worry about. The never-ending trade war enters yet another round of negotiations, geopolitical risks simmer, many economic reports (both in the U.S. and around the globe) remain weak, the size of negative-yield debt is becoming nearly as large as U.S. GDP, the U.S. stock market continues to exhibit a worrisome “triple-top” pattern, small cap stocks continue to trail, the yield curve is still inverted and, because of a “strong” jobs report on Friday, there is now doubt about whether the Fed will cut interest rates later this month.
Beware… Fiscal Policy May Screw Up The Conventional Playbook?
Like today, the Federal Reserve usually sucks all the oxygen out of the national economic-policy conversation. And, why not? It is comprised of a small elite group who hold conferences in exotic locations (Jackson Hole), have regular strategy meetings culminating in ‘must-see’ press conferences, make dot-plots sound interesting, and, between meetings, members regularly spout-off contradictory opinions.
Who Has The Outlook Correct… Stocks Or Bonds?
U.S. bond yields have been declining all year despite a stock market which continues to trend higher. The stock market appears optimistic about the future of this recovery, whereas the bond market is acting increasingly nervous.
A Three-Gun Gooser
This week the Federal Reserve delivered the requisite preamble signaling an inevitable cut in the Fed funds rate. Following that, the 10-year Treasury yield declined below 2%, financial markets now point to a 100% probability of a rate reduction, and the old adage ‘Don’t Fight the Fed’ has been ringing in investors’ ears.
Watch What I Do… Not What I Say!
Surveys are conducted frequently on Wall Street as investors are always assessing whether there are too many bulls or too many bears. The problem with surveys is people do not always do what they say (perhaps as we found out leading up to the last presidential election).
The Odd Couple?
A survey asking equity investors whether the stock market does best with a strong or weak U.S. dollar would likely yield a variety of contradicting opinions—and they would all be correct! Like many couples, the stock/dollar relationship is complicated. Sometimes they get along blissfully, other times they separate because they find they rarely agree and, often, they simply seem indifferent to each other. They are an odd couple!
Will Stimulus “Trump” Trade?
U.S. economic growth has recently slowed and most attribute the weakening to trade wars now being fought on several fronts (China, Mexico, Europe?). Bond vigilantes have become so concerned about the potential for negative economic fallout that they have inverted the yield curve.
What Doesn’t Kill You… May Make You Rich?
The bond market is now the primary fear for stock investors. Bond yields just keep declining, the yield curve has again inverted, and many wonder ‘why is the bond market so spooked?’ Could it be signaling a recession and therefore a bear market?
Concepts On The Cranium
Just some unrelated thoughts this week. A few concepts for the cranium!
Say Hi To Goldie?
Despite the current trade war with China, the U.S. economy has taken on an air of ‘Goldilocks’ since the December stock market swoon. Real economic growth has slowed, and both inflation and interest rates have moderated. The pace of growth is no longer too hot—as it was last year—nor has it yet become too cold—as most feared earlier this year.