Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

As we witnessed over the weekend, the Caribean and Florida took a beating from Hurricane Irma, and its impact is going to be a major source of weakness in the economy for the current quarter. Paired with the impact of Hurricane Harvey, we’re looking at one-two punch to the GDP gut and we expect existing GDP forecasts for 3Q 2017 will be revised sharply lower in the coming days. That’s enough to rattle the market, but there are other reasons investors should be increasingly cautious. Last week, when speaking at a conference in Germany, Goldman Sachs (GS) CEO Lloyd Blankfein shared that he was “unnerved” by things going on in the stock market. As we’ve been analyzing the economic data and watching the political landscape in Washington, we here at Tematica have been talking about a growing sense of unease in the market over the last several months. Yet, the market has at least thus far managed to shrug these mounting concerns off its proverbial shoulders.

In today’s increasing frenetic society, short attention span filled society sometimes it takes a “voice from on high” to catch people’s attention and wake them up. All it took was a short comment from Blankfein during the question and answer session of his presentation at a conference in Germany:

“Things have been going up for too long,” he told attendees at a Handelsblatt business conference in Frankfurt. “When yields on corporate bonds are lower than dividends on stocks? That unnerves me.”

 

We certainly share Mr. Blankfein’s concerns and have been hammering the points home weekly in our Monday Morning Kickoff report and the Cocktail Investing Podcast.  To fully understand the source of Mr. Blankfein’s current unease let’s explore his statement:

 

#1: “Things have been going up for too long.”

While there have been modest pullbacks in the market, like the ones in late 2014 and the second half of 2015, a longer view shows the major averages have moved sharply higher over the last five years, with the S&P 500 in the upper range of its long-term upward trend. Before factoring in dividends, the S&P 500, a key benchmark of institutional investors, is up more than 70% since September 2012.

More recently, the S&P 500 has gone more than 300 trading days without a 5% or more pullback, the longest such streak since July 19, 1929. For those wondering, the record still sits at 369 trading days per Dow Jones data. Historically speaking periods of suppressed volatility tend to be followed by periods of heightened volatility, as market volatility reverts back to its mean. Given the extended period of low volatility, the probability of entering a period of heightened volatility moves higher.

As the stock market has moved higher, so too has its valuation. As we write this, the S&P 500 is trading at 18.7x expected 2017 earnings versus the 5 and 10 year average multiples of 15.5x and 14.1x, respectively. In 2015 and 2016, we saw earnings expectation revised lower during each year until annual EPS growth was nil. With economic data that is once again leading the Atlanta Fed to reduces it GDP forecast, we’re seeing downward earnings revisions to EPS expectations in the back half of 2017. We at Tematica classify that as “unnerving.”

 

#2: The Current “Recovery” is Now Over 100 Months

If we look back to when the stock market bottomed out during the Great Recession, the timeframe for the current “recovery” has been over 100 months. By comparison, the average economic expansion over the 1945-2009 period spanned 58.4 months. In other words, the current expansion is rather long in the tooth and a variety of data points ranging from slowing growth in employment to peak housing and auto to a flattening yield curve support this assessment. While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point

While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point it will come to an end. As the Fed looks to unwind its balance sheet and gets interest rates closer to normalized levels, we’re reminded that the Fed has a track record of boosting interest rates as the economy heads into a recession. Let’s not forget that every new presidential administration coming in after a two-termer going all the way back to 1900 has experienced a recession within the first twelve months. Yep, we color that as “unnerving.”

 

#3: The Market’s Post-Election Euphoria Has Worn Off

Coming into 2017 there was a wave of euphoria surrounding newly elected President Trump with high hopes concerning what his administration would accomplish. Over the last few months, a number of executive orders have been administered, but we have yet to see any progress on tax reform or infrastructure spending. The risk is that expectations for these initiatives are once again getting pushed out with tax reform that was slated for August now being expected (don’t hold your breath) near the end of 2017. The risk is the underlying economic assumptions that powered revenue and EPS expectations in the second half need to be reset, which will mean those lofty valuations are even loftier.

 

#4: Precious Metals Are Gaining Strength

Since August 1, Gold, Silver and the Utilities sector have significantly outperformed financials and consumer discretionary stocks – never a positive sign. The KBW index of regional banks has fallen below is 50-day, 100-day and 200-day moving averages and is down over 18% from its March 1st

 

#5: The Breadth of Current Rally Isn’t Looking So Hot

The median Dow stock is down more than 4% from its 52-week high and the median S&P 500 stock has dropped nearly 7.5%. Only 44% of Nasdaq members are trading above their 50-day moving average.

 

#6: Another Contra-Indicator Has Reared its Head — Individual Investor Confidence

TD Ameritrade’s (AMTD) Investor Movement Index (IMX) has continued its month-over-month rise. For those unfamiliar with this, it’s a behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what investors are actually doing and how they are positioned in the markets. The higher the reading, the more bullish retail investors are. In August, the IMX hit 7.45, up from 7.09 in July, to hit an all-time high.

Why is that unnerving you ask?

While TD Ameritrade opted to put a rosy spin on the data, saying, “Our clients’ decision to continue buying reflects the resiliency of the markets.” Institutional investors, however, see this continued surge higher as a warning sign. Here’s why: Historically speaking, retail investors have been late to the stock market party. Not fashionably late, but really late, which means they tend to enter at or near the point at which things start to go seriously awry.

Complicating things a bit further, over the last month CNNMoney’s Fear & Greed Index has slumped from a Neutral reading (52) to Fear (38). Taking stock (pun intended) of these two indicators together at face value sends a mixed message on investor sentiment. Not a hardcore piece of data like the monthly ISM data, but one institutional investors and Wall Street traders are likely to consider as they roll up their sleeves and revisit the last few weeks of data.

 

How to Know What’s Next

These are just some of the points that could be unnerving Blankfein. Generally speaking, the stock market abhors uncertainty and anyone of those points on their own would be a cause for concern. Taken together they are reasons to be cautious as we move deeper into September, which is historically one of the most tumultuous months for stocks.

Whether you’re a subscriber to Tematica Investing or not, we would recommend you subscribe to both our Monday Morning Kickoff and Cocktail Investing Podcast to get our latest thoughts on the economy, the stock market as well as thematic signals that power our 17 investing themes.

 

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Despite yesterday’s move higher in the stock market, March to date has seen the Dow Jones Industrial Average move modestly lower with a larger decline in the Russell 2000. Only the Nasdaq Composite Index has climbed higher in March, bringing its year to date return to more than 9 percent, making it the best performing index thus far in 2017. By comparison, the Dow is up 4.75 percent, the S&P 500 up 5.35 percent and the small-cap heavy Russell 2000 up just 0.75 percent year to date.

So what’s caused the move lower in the stock market during March, bucking the upward trend the market enjoyed since Election Day 2016?

Despite the favorable soft data like consumer confidence and sentiment readings, investors are waking to the growing disconnect between post-election expectations and the likely reality between domestic economic growth and earnings prospects. Fueling the realization is the move lower in 1Q 2017 earnings expectations for the S&P 500, per data from FactSet, as well as several snafus in Washington, including the pulling of the vote for the GOP healthcare plan. These have raised questions about the timing and impact of President Trump’s stimulative policies that include infrastructure spending and tax reform.

We’ve been steadfast in our view that the earliest Trump’s policies could possibly impact the US economy was late 2017, with a more dramatic impact in 2018. On a side note, we agree with others that would have preferred to have team Trump focus on infrastructure spending and tax reform ahead of the Affordable Care Act. As we see it, focusing on infrastructure spending combined with corporate tax reform first would have boosted confidence and sentiment while potentially waking the economy from its 1.6 to 2.6 percent annual real GDP range over the last five years sooner. We’d argue too that that would have likely added to Trump’s political war chest for when it came time to tackle the Affordable Care Act. Oh well.

 

Evolution of Atlanta Fed GDPNow real GDP forecast for 2017: Q1

 

So here we are and the enthusiasm for the Trump Trade is being unraveled as growth slows once again. As depicted above, the most recent forecast for 1Q 2017 GDP from the AtlantaFed’s GDPNow sits at 1.0 percent compared to 1.9 percent for 4Q 2016 and 3.5 percent in 3Q 2016. Even a grade school student understands the slowing nature of that GDP trajectory. Despite all the upbeat confidence and sentiment indicators, the vector and velocity of GDP forecast revisions and push outs in the team Trump timing has led to to the downward move in S&P 500 EPS expectations for the current quarter and 2017 in full.

With Americans missing bank cards payments at the highest levels since July 2013, the delinquency rate for subprime auto loans hitting the highest level in at least seven years and real wage growth continuing to be elusive, the outlook for consumer spending looks questionable. Factor in the aging of the population, which will have additional implications, and it looks like the consumer-led US economy is facing more than a few headwinds to growth in the coming quarters. These same factors don’t bode very well for the already struggling brick & mortar retailers like Macy’s, Sears, JC Penney, Payless and others.

Now here’s the thing, currently, the S&P 500 is trading at 18x 2017 expectations —expectations that are more than likely to be revised down than up as the outlook for U.S. economic growth in the coming quarters is revisited. In three days, we close the books on 1Q 2017 and before too long it means we’ll be hip deep in corporate earnings reports. If what we’ve seen recently from Nike, FedEx, General Mills, Kroger and Target is the norm in the coming weeks, it means we’re more likely to see earnings expectations revised even lower for the coming year.

While it’s too early to say 2017 expectations will be revised as steeply as they were in 2016, (which started the year off with the expectation of a 7.6 percent increase year over year but ended with only a 0.5 percent increase following 4Q 2016 reporting), but any additional downward revisions will either serve to make the market even more expensive than it currently is or lead to a resumption of the recent downward move in the market. Either way, odds are there is a greater risk to the downside than the upside for the market in the coming weeks.

Buckle up; it’s bound to get a little bouncy.

Cocktail Investing Ep 9 – So Janet Yellen & the Fed are Data Dependent You Say?…Is the Stock Market Listening to the Hard Data?…Amazon’s Next Target – Liquor Stores and more Thematic Signals

Cocktail Investing Ep 9 – So Janet Yellen & the Fed are Data Dependent You Say?…Is the Stock Market Listening to the Hard Data?…Amazon’s Next Target – Liquor Stores and more Thematic Signals

It was quite a week that started off with winter storm Stella, a Fed interest rate increase and finished up with St. Patrick’s Day. Your resident mixologists, Chris Versace and Lenore Hawkins, were busy sharing their thoughts on all of that as well as the February Retail Sales report this week and break it all down for you on this episode of Cocktail Investing. As usual, the High Priestess of Global Macro that is Lenore Hawkins has a number of data points to share that will raise eyebrows over what the mainstream financial media is calling an “improving economy.” Keep in mind that even if the Fed’s GDP forecast rings true through 2019, it means we will have experienced 14 consecutive years with annual GDP not breaking past 3.0 percent. As Lenore points out, that’s never happened before, not even during the Great Depression.

Sounds like some big headwinds to growth and yet the “data dependent” Fed raised rates even though the Atlanta Fed slashed its GDPNow forecast for 1Q 2017 to 0.9 percent last week vs. more than 3.0 percent at the start of January and 4Q 2016’s GDP of 1.9 percent. Was the Fed’s March interest rate increase because of inflation or was it because of something else?

Chris and Lenore share their thoughts on all of that as well as several Thematic Signals that we collect each and every day that serve to confirm our 17 investment themes. During this episode, they’ll share some of the latest that pertain to our Connected Society, Aging the Population, Foods with Integrity and Guilty Pleasure investing themes. On St. Patricks day on a show titled Cocktail Investing, it’s rather fitting to talk about how Amazon is putting liquor stores in its crosshairs.

More Thematic Signals can be found each and every week here. If you’d like to listen to past episodes of the Cocktail Investing Podcast, you can find them here.

Companies/Stocks Mentioned on the Podcast

  • Amazon (AMZN)
  • Boxed.com
  • Consumer Discretionary SPDR ETF (XLY)
  • International Flavors & Fragrances (IFF)
  • JPMorgan Chase (JPM)
  • McCormick & Co. (MKC)
  • Netflix (NFLX)
  • Outerwall
  • Redbox
  • Russell 2000 (RUT)
  • S&P 500 (SPX)
Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist

Market Highs Again – Where Next?

Markets are at all time highs, what is an investor to do? On August 13th I had the pleasure of speaking with Stuart Varney on Fox Business concerning the sky high valuations in the stock market amid contracting earnings, earnings which are also highly deceptive given the level of financial engineering management has used to artificially boost earnings per share through share-buybacks, which are often debt funded!

We’ve yet to see the economy return to pre-crisis normal growth rates and businesses around the country consistently site government red tape as one of if not their biggest burden. Meanwhile the markets wait breathlessly to dissect the latest words out of a Fed officials mouth. We now live in a world in which the asset prices are heavily dependent on commentary from unelected bureaucrats. Me thinks it unlikely that this all ends well!

Not entirely sure why I was smiling that much… I suspect I may have had just a tad too much coffee. Apologies for the dental display!

Have We Seen the Worst of 2016

On February 16th, I was on Maria Bartiromo’s show on Fox Business and spoke with PNC Wealth Management Chief Investment Strategist Bill Stone on the state of the markets.

We are in relatively unchartered territory with a roughly $9.5 trillion USD carry trade being unwound and enormous over-investment in commodity/oil production, driven in no small part by expansionary monetary policies in the U.S., Europe and Japan.

Crashing oil prices are pushing the majority of sovereign wealth funds into being sellers of assets in order to make up for budget shortfalls.

Suppressed yields have pushed pension funds and insurance companies into excessive risk-taking and forced selling in order to meet distribution demands.

Individual investors are reasonably nervous about stocks…who is left to buy?