The U.S. economy appears to be chugging along at 3% growth. The Atlanta Fed and the NY Fed GDP models line up at 3.2% growth in 4Q. Economist forecasts are slightly lower at 2.7%, but this is a pretty positive outlook.
Investor sentiment is an interesting contrarian indicator. There appears to be a lack of bearish sentiment right now with the bull bear ratio at levels not seen since 1987. The S&P 500 is up 25% over the past 12 months and 17% year-to-date. We cannot count on returns like these going forward. Assuming equity returns in the high single digits is reasonable. After the market delivers outsized returns, a portfolio's allocation will naturally drift away from target. At some point, the portfolio should be rebalanced back to target allocations. When I see sentiment extremes such as this, I think it might be an appropriate time to look at rebalancing. Full Yardeni research document available here.
3Q GDP growth was released this morning at 3%. The New York Fed Nowcast Model forecasts 3% growth in 4Q. Growth in 2Q was 3.1%, so 2017 is shaping up to be pretty strong from an economic growth perspective.
Mega cap tech earnings came in strong this week. The strong earnings and economic data propelled the S&P 500 to new all-time highs. There has been some recent weakness in the defensive sectors, healthcare and staples, which currently offer some value.
Yikes! The U.S. looks extended as measured by the CAPE, cyclically-adjusted PE ratio. Overweight emerging markets versus the U.S. looks appropriate. See original tweet here.
Housing starts have come well of the lows seen in 2009-11. Although starts as a percentage of population have roughly increased from 0.2% to almost 0.4%, there still appears to be room for further improvement. Read the full article here.
Per capita spending on discretionary services finally surpasses pre-recession peak. No wonder people are still apprehensive about their financial security. Read the full article from marketwatch.com here.
This is a good article by Business Insider's, Linette Lopez, which talks about the problems in the U.S. health care system which are not being addressed. In fact, the president of the U.S. is actively trying to make the problems in the health care system worse. Read the full article here.
The S&P 500 Index is up 14.2% ytd, not too shabby! Prudent to assume high single digit returns going forward though (7-8%). Read full article here.
The Social Security COLA for 2018 is 2.0%. This Forbes article states that most retirees will not see the additional 2.0% because of an increase in Medicare Part B premiums. Read the full article here.
The most pessimistic investment managers, as measured by the NAAIM (National Association of Active Investment Managers) Exposure Index, are now over 90% long the market. This makes absolutely no sense. I guess everyone is now long the equity market, so it must be time for a selloff.
Loomis Sayles analyst, Craig Burelle, maintains a positive outlook for risk assets, particularly emerging market equities. Burelle looks for equities to produce positive returns over the next year, but less than historical average returns. This sounds reasonable since the S&P has historically returned 10% per annum. Not many analysts are looking for double digit returns going forward from current levels. It's more reasonable to dial down return expectations toward the 7% - 8% area. Therefore, a reduced or underweight equity allocation might be appropriate. Or rotate equity exposure into more defensive allocations such as utilities, staples, and healthcare. Read the full article here.
Lots of good information here from Doug Short. Make your own conclusions.
GDP growth expectations look to be picking up. The GDPNow forecast from the Atlanta Fed is 2.5% for 3Q. The more bullish indicator for me is the pickup in the 4Q Nowcast forecast from the New York Fed. Unlike the Atlanta Fed model which only forecasts the upcoming quarter, the New York Fed model forecasts the upcoming 2 quarters.
As you can see from the 3Q and 4Q forecasts from the New York Fed, there is an expectation of a 1% pickup in growth from 3Q into 4Q. Both the Atlanta and the New York models are indicating firm growth, and this has probably helped buoy U.S. equities this week. Looking at the breakdown of the data impacting the forecast, it was Monday's strong ISM Manufacturing survey which moved the model estimate of 4Q GDP growth up 0.5%.
This article states the FDA is approving drugs faster under the Trump administration. The FDA is quoted as saying safety standards have not been relaxed. But the article then goes on to give an example of a cancer drug which was recently approved without a label restriction to the subset of patients it was tested for. This is absolutely unheard of. Previously, the FDA would have put a restriction on the label to those patients with the genetic mutation which the drug was tested on. Instead, in today's upside-down world, the FDA sees it appropriate the drug carries no patient subset restriction. Doctors may unknowingly prescribe this drug to patients without the correct genetic makeup instead of a drug that might actually help them. Embarrassing example of the sad state of the U.S. government which is trying to increase drug competition at the expense of patients lives. Read the full article from Bloomberg here.
Emerging markets are having a big year with ytd return above 27%. That's great, but the real surprise is the max drawdown is only 3.5%. Now that is some steady gains. Not much more to the article by ETFreplay.com, but you can read it in full here.
Here's a nice article on the new all-time highs made by small- and micro-cap stocks. I am not sure I am as bullish as JC who writes, "we cannot be short or even underinvested...". I find myself remaining a bit cautious until it is clear that the current economic slowdown is solely hurricane related. Also, I think the Fed is on hold right now, so if they do tighten in December, I am not feeling bullish about that unless it is accompanied by a prior pickup in the economic data. Basically, I am comfortable waiting to see more strength in the data before becoming overly bullish at this time. The global economy is strong and seems to be picking up steam. I prefer to overweight overseas developed and developing markets over the U.S. right now. Read JC's full article here.
Good article by Jen Skeritt at Bloomberg on the impact of Trump's 31% tariff on Canadian lumber. Skeritt points out that the entire tariff has been passed on to the U.S. consumer through higher prices, and Canadian lumber producers are actually benefiting from the higher prices. The loser in this trade war has clearly been the U.S. home builders and home buyers who are paying the higher prices. The reason this has happened is because U.S. demand for Canadian lumber is strong, making the demand elasticity low. If demand elasticity were high, then Canadian producers would not be able to pass along the cost of the tariff to U.S. consumers. This is so elementary, it is taught in high school economics 101. Sad and discouraging to see our government implementing policy a high school student could see will fail ex ante. Read the full article here.
9/25/2017 0 Comments
IHS Markit analyst, Chris Williamson, takes an optimistic view of the economy, calling it 'resilient' during a month of hurricane disruptions. He believes the economy is growing at a rate just over 2% in 3Q. Although 2% growth is probably enough to be supportive of equity markets, I am more cautious given the recent and significant downgrade of growth estimates from the 3% area to the 2%. If the slowing growth is solely due to hurricane effects, then growth should bounce back relatively quickly toward the previous 3%. If there are other reasons for the slowdown, the Fed tightening for example, then the slowing of growth should be viewed with potential for further deterioration toward the 1% area which would be negative to the equity market in general. Read the full IHS Markit research here.
Here's a positive article from Yale on coal consumption in the U.K.. As you can see from the chart, coal consumption in the U.K. has fallen out of bed over the past 2 years to represent less than 2% of power production. I hope the U.S. and China follow the U.K.'s led away from coal. The U.S. power production was 32% coal last year. Read the full article here.
Korean exports are the first trade data reported each month by any nation. The data provide an early look at how the economy is performing in the first 20 days of September. The strong Korean export data point to a continuation of synchronized global growth. Read the full article here.
Weak data today takes a big bite out of NY Fed's 3Q GDP Nowcast estimate. The weakness was mainly coming from Hurricane impacted production data. The utility, mining and manufacturing components were all lower. The problem is that if the Hurricane weakness is temporary, then you would expect 4Q GDP expectations to increase on the snap back. Unfortunately, this is not the case.
As you can see, the 4Q estimate dropped precipitously as well.
I would agree with the assessment that the Fed is going on hold in regards to rate hikes until next year. The reason being stubbornly low inflation. With the economy at or near full employment, the Fed is wondering why inflation remains well below their 2% target. The July reading on the core PCE was 1.4%. Until the Fed has a better explanation for the persistently low inflation, I think the Fed will let the economy run above trend growth into next year. August core CPI did come in above consensus today at 1.7%, the first upside inflation surprise since February.
Correlations are currently low, and the below linked article from topdowncharts.com argues this is a short-term bearish indicator. I tend to disagree with this point of view. I believe that high correlations are an indication a market is sick and low correlations indicate a healthy market. The proper function of capital markets is to allocate resources to more productive enterprises. A low correlation between securities indicates the market is executing that function. Read the full article here.
Michael Grove, CFA