After the bounce-back to even the books at quarter’s end, one would expect a pause to be normal. This time around is not much different. With the manic-depressive emotional bend in the crowd, the clock says a bout of depression should follow that bounce.
Let’s see if we can find a silver lining (hint: there is one)
If you feel like you have been on the ropes as an investor for a bit, it is understandable. Taking a longer view, the S&P 500 is currently sitting in the exact same price range as it was 18 months ago. Looking more and more like the 94/95 pause – where the masses were also assured a recession was coming – the recovery remains “subpar” as many like to say.
It’s true – if you think only of “now” and not “next”.
In the “now” column:
Secular Stagnation as Dr. Ed likes to put it. The pace of global economic growth remains subpar. That’s been so during most of the current economic expansion. That’s the way it looks on the surface as we blend all the data together.
My wife is an excellent artist. When she paints, if she blends all the colors together, it turns an ugly gray tone. Economic data tend to do the same if we make the error of slicing and dicing too much.
Overall, global growth is struggling as sectors adjust to “what’s next” and the baton is passed.
Global events took some of the spotlight in Janet’s latest speech (3/29) on monetary policy. She focused on this issue near the beginning of her prepared remarks:
“Looking forward however, we have to take into account the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year. … In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. By themselves, these developments would tend to restrain U.S. economic activity. But those effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending. For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty.”
In their latest readings, the global manufacturing index edged up to 50.5 from 50.0 the month before, which was the lowest reading since November 2012. Among advanced economies, the US M-PMI rebounded smartly to 51.8, the first reading above 50.0 since August 2015. On the other hand, Japan’s index dropped to 49.1, the first reading under 50.0 since April 2015. In Europe, both the UK and Eurozone indexes edged up to 51.0 and 51.6, respectively.
Looks like gray tones to me.
Among emerging economies, China’s official M-PMI rose back above 50.0 for the first time in nine months to 50.2, while the comparable Caixin/Markit index jumped to 49.7, the best reading since February 2015. India jumped from a recent low of 49.1 during December to 52.4 in March. Indonesia rose to 50.6, the first reading above 50.0 since September 2014. Even Brazil edged higher to 46.1, but has been below 50.0 for the past 14 months.
While the current rage is oil price by the millisecond, the CRB raw industrial’s spot price index, which does not include any petroleum products, has rebounded 11% since November 23.
Weeks ago, the fears were focused on $10 oil and a dollar getting too strong. Really? Neither is happening and be assured when the dollar pauses as it should, we will be told that is bad for us too.
So noted, we stand by the arguments we have made against oil for more than 18 months now: circumstances changed – the landscape shifted.
“What’s next” has taken down its first big victim – expensive oil.
While the OPEC boys argue over unlikely freezes, be assured a freeze (if it arrives) will only have a short-term effect. Oil’s number is up. It’s time value now on the downside of the curve. In 15 years, our kids will ask us, “You guys actually powered industry with this stuff?”
Earnings Matter To Janet
It is good to see that Ms. Yellen may be learning by doing and finally may be recognizing that profits matter.
As noted in her latest speech, she is right about earnings expectations: They have been falling for a while as oil prices tumbled and the dollar soared. Foreign sales account for about half of S&P 500 revenues, so the weak pace of overseas growth and the strong dollar have been weighing on earnings.
Yellen should be pleased to see that the dollar has declined by 5% since January 20 as currency markets started to discount the possibility that the FOMC would slow the pace of monetary normalization.
Pause and Focus: Housing (the silver lining?)
The home-builders may have already figured it out. Keeping supply tight is a way to milk prices higher. The age old lesson in supply and demand.
It was not too long ago when the focus of the day was the endless supply of homes. We were told by experts that we would never work our way out of it.
How times have changed as Generation Y just starts to leave their parent’s homes.
This is the fringe beginning of that movement. Tens of millions will need a new place over the next 3 to 9 years. Tens of millions.
Already though, the current housing market is badly constrained by a complete lack of inventory.
As shown at below left, existing home sales have basically recovered to levels that prevailed in the early 2000s, and they’re doing so with very little inventory.
The most recent figures show homes available for sale (chart, middle left) meeting less demand than any month other than the peak of the boom in 2005.
This isn’t leading to higher existing home sales because existing home sales are dramatically higher than new starts (incremental supply). As shown in the bottom left chart, there are 6 existing homes sold for every 1 started; still very elevated historically.
Tight supply is less obvious in the new home market but what is obvious is that turnover is very fast (i.e. very low time on market) and prices are very high on an absolute dollar basis. While the number of new homes sold every year is still barely one-third of the 2000s peak, price is now 15% higher for the median home.
Recently the median time on market for new homes registered an all-time low, and while it bounced in the shoulder season of the calendar we expect that figure to remain well below historical averages given tight supply.
The Big Picture Summary
I kept some of this in from yesterday’s note:
At a few times in history we have gotten too lost in the details (all the red dots above).
This is one of those times. In a world being shaped by massive demographic shifts, I feel one is well served to step way back from the “chaos” for a moment and ponder that larger event.
Ignore the “economic” aspect of the news.
Think demographics instead.
The latter drives the former – it is not the other way around.
The future in the US is far brighter than most perceive at this time. Massive fear remains just below the surface. We are mired in a million reasons we cannot survive. Experts are falling all over themselves to conjure up the next monster to devour us.
I could go on but this is not the way secular bull markets end…..it’s how they rest, pause, reset
– and then enter their next stage of growth.
We are hard at work on the Q1 quarterly review which will be out in a research report (and video review) for you later in the week.
In the meantime, pray for more corrections this quarter.