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.
Good article on the decrease in outstanding equity along with the increase in outstanding debt of American corporations. This makes sense given low interest rates and attractive investment opportunities. Time will tell how this ends, but my feeling is this leveraging of corporate balance sheets will continue, as long as rates remain low and the underlying business are not deteriorating. Read the full article here.
Michael Grove, CFA