Investors are strongly…. neutral but then there's TINA & JOLTS
As the S&P 500 repeats its attempt to break through the 2015 highs and get out of the trading range it has been in for over two years, investors are strongly…neutral, (once again) at least according to the American Association of Individual Investors survey.
US Investor Sentiment, % Neutral data by YCharts
In fact to find a time when investors have been more neutral than the recent highs you’d have to go back to 1988!
Since the stock market peaked over a year ago, earnings for the S&P 500 have declined 8%. In fact the current level of per share operating earnings are around the same level it was in the second quarter of 2011; five years later and earnings at the same place but the S&P 500 is 50% higher.
Investors are neutral, the market is seriously overbought, but many have already left the dance floor with investors having pulled over $100 billion from equity funds so far this year.
Looking at other measures of market sentiment, in the past two months the net speculative position on the S&P 500 on the CME has swung from a net short of 17,474 to a net long of 12,028 contracts. That’s a big change in attitude! We’ve seen the opposite with bonds as the 10 year US Treasury has gone from 2,706 net long positions to 159,930 net shorts and is the most bearish in over a year.
What’s driving this?
Yesterday we talked about FOMO, so today, meet TINA aka There Is No Other Alternative. With an aging population across most of the developed and more affluent world, retirees and soon-to-be retirees are desperate for somewhere to put their savings. About 25% of OECD debt has negative interest rates, which means investors are paying for the privilege of lending out their money. Just today UK Gilt yields (10 year at 1.263%) and German Bunds (10 year at 0.049%) have hit record lows and with the European Central Bank no longer confining itself to just purchasing sovereign debt, yields are likely to keep going down until something breaks. The Swiss government just announced plans to issue a 13 year bond with a zero coupon – good times!
But then there is the JOLTS report, which after Friday’s dismal non-farm payroll mega-miss, delivered some much welcome hope in the form of the fifth consecutive month of rising job openings. So it’s all good, nothing to worry about, moving on… or is it?
The problem is that job openings don’t drive economic growth, hirings do. While job openings have been increasing, actual hirings have been shrinking: down -198k after -220k in March for a combined 418k, which is the fourth steepest decline on record and was broad based, meaning across all sectors rather than concentrated in just energy for example. The hiring rate for February was 3.8%, dropping to 3.7% in march and down to 3.5% in April for the lowest level since last August. We are also seeing voluntary quits, a reflection of how confident people are with their ability to find a new job, has called in three out of the past four months.
Right now we are seeing a divergence in signals from the data with core capital good, (non-defense capital goods ex-aircraft) shipments and orders falling. The most recent reports show a decline in shipments of 7.7% on an annualized basis with 4.8% year-over-year decline. Orders dropped 8.8% on an annualized basis with a 4.4% year-over-year drop, so both are accelerating to the downside. Here’s the big question.
