Quote of the Week
“Always go to other people’s funerals, otherwise they won’t come to yours.” – Yogi Berra
U.S. stocks reached another record high, rising for the sixth straight week, the longest streak in two years. While trade negotiations remain fluid, the prospect of a limited trade deal between the U.S. and China has been the key driver of the market rally over the past month. Global economic data remains mixed, with softer October retail sales and industrial production in China, but firmer than expected eurozone GDP decline that is starting to slow in its descent.
As I have said before, it would surprise me if there will be a limited trade deal with China. As I read the issues, the hang-up still is the issue of China requiring U.S. companies doing business in China to share their technology with China. Plus, China still wants to steal our technology, subsidize Chinese companies to compete against our companies, and at any time manipulate their currency.
U.S. stock market valuations are stretched, and economic indicators are still going in the wrong direction. Hedgeye, the company we use to allocate your portfolios, is now projecting 0.31% growth in the GDP for the fourth quarter, down substantially from the third quarter.
What in the World Is Going On?
The yield curve inverted recently. The definition of an inverted yield curve reflects a scenario in which short term debt instruments have higher yields than long term instruments. Typically, long term bonds have higher yields than short term bonds. An inverted yield curve is often seen as an indicator of an impending recession. In real terms, the interest rate on the 2-year U.S. Treasury note has exceeded the interest on the 10-year U.S. Treasury bond.
The inverted yield curve has preceded six out of the last six recessions. The lead time from when the yield curve inverts and a recession starts is between nine to 22 months. Certainly, this indicator is a warning of falling growth. But there are some other fundamental leading indicators that are also meaningful. The following are some indicators that I find pertinent.
The financial and retail sectors started underperforming the S&P 500 before the 2007 market top, and they are doing it again. Financials peaked in February 2018 and have largely underperformed ever since.
The retail sector peaked in July 2018 and has underperformed even more so since. Retail Sales Control Group is down again in October by 0.40%. Amazon has underperformed the S&P 500 since June 2018 and is down 5.7% over the last six months.
RV sales peaked in 2017 and have accelerated down 20% year over year into 2019. RV sales also led the October 2007 top and January 2008 recession by almost two years, which should put the recession starting in 2020.
The Consumer Discretionary sector has also been underperforming the Consumer Staples sector since June 2018, meaning consumers are increasingly buying what they need, not what they want.
Consumer confidence has continued to rise since 2014, while GDP growth peaked and has been steadily declining. Those two have rarely diverged that long. Yet, consumer sentiment from the Michigan Survey has dropped from over 100 to 95 in the last few months.
Elsewhere, there are other reports of high-end consumer spending falling, including real estate in the hottest areas from London to Manhattan to San Francisco. High end auto purchases are getting record discounts.
There are many other indicators such as Industrial Production, Manufacturing Production, Corporate Earnings, on and on that are falling.
Obviously, no one can predict the future, but the indicators are trending down while the stock market is going up. As an old friend told me once, “what can’t go on forever, won’t.”
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
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