Just some noodling over an array of issues including:
- What private sector confidence currently suggests about the stock-bond allocation tilt?
- Is the fuel for Populism fading?
- Will winning the trade war cause U.S. stocks to lose?
- How have stocks performed once the unemployment rate bottoms?
- What does a 2019 U.S. economic slowdown imply for the 2020 election?
- A nice revaluation refresh for stocks!
Emerging Markets (EM) are not generally considered defensive investments and, therefore, investors do not often turn toward these economically-sensitive stocks near the end of a bull market cycle. However, as Chart 1 highlights, if the current economic expansion/bull market is in its late innings, perhaps you should consider “Emerging for the Finish.”
During the December carnage many Bulls were killed on the battlefield and others badly wounded. This year, although the skirmish has quieted, most remain on edge. However, investors may just now be jumping out of their foxholes because the Cavalry has recently been sighted coming over the hill with bugles blaring!
The next recession, whenever it is, could face an unusual headwind. Normally, recessions are about liquidating fundamental excesses. Restoring health to balance sheets which were abused in the last expansion, purging bad business decisions, restoring liquidity, replenishing savings, and restarting the profit, job, and income creation cycles.
In 2018, the U.S. recovery was on a path toward recession. It couldn’t last much longer growing above 3% in real terms and 5.5% in nominal terms, with an unemployment rate below 4%. Wages, consumer, producer, and commodity prices were rising and the Federal Reserve (Fed) and bond vigilantes were tightening.
Amongst the carnage and ongoing financial market volatility are a few encouraging signs the stock market may eventually regain its footing. As the pictures below illustrate, a proprietary U.S. economic momentum indicator suggests that recession fears may lessen by the spring, valuations have now fallen well below levels justified by bond yields, investor mindsets are quickly shifting away from overheat fears, and the U.S. dollar may finally be breaking down.
Welcome to 2019! As we begin the New Year, volatility (the stock market’s VIX volatility index spiked above 30 last week) and uncertainty (Bear Market, Recession?) reign. Amongst all the chaos, and with much personal trepidation over what may actually happen this year, here are some observations and a few guesses for 2019.
Emerging Markets (EM) are not normally considered a safe place to hide during severe stock market corrections—but they have been in the latest equities swoon. As shown in Chart 1, while the S&P 500 composite stock price index has declined by more than 14% from its high on September 20th, the MSCI Emerging Market stock price index has only declined by about 7%.
Recently, when Federal Reserve Chairman Jerome Powell and President Donald Trump both blinked—one on rate hikes and the other on trade wars—the S&P 500 surged by more than 6% in about a week! Many sensed the primary challenges holding back stocks were finally resolving and sentiment quickly turned bullish as investors did not want to miss the Santa Rally!
The valuation of the stock market has been under steady pressure this year. The S&P 500 trailing price-earnings (P/E) multiple has declined by about 25% from a recovery peak of 23 in January to about 18. The hope for this bull market is that P/E contraction is almost over, allowing stock prices to again rise with earnings gains.
We first published the accompanying chart in March of this year. The PP Ratio had just spiked sharply upward in the previous three months, as it did near the end of the dot-com era in 2000. Since March, in a very similar fashion as shown, the PP Ratio has eerily traced the same path as during the dot-com era.
he velocity of the money supply measures the pace at which cash is spent in the economy, or the amount of total GDP activity created by each dollar of the money supply. Monetary velocity has long been a focal point for the Federal Reserve, economists, and investors because its growth often shapes the character of the recovery.
Solid economic growth and fabulous profit results have underpinned the stock market in the last couple years. Since the presidential election, the global economic recovery exhibited a rare synchronization for a time, and within the U.S., confidence measures rose from mediocre to near post-war highs...