Weekly Update: Almost heaven
While Americans are likely to see their own flaws, foreign investors tend to see largely America’s virtues—particularly the fact that we possess population growth, an openness to immigration, and, most importantly, the natural resources that could allow the U.S. to grow its way out of its problems better than perhaps any other country in the G-7. This is the positive black swan I occasionally mention. It is interesting to see Strategas Research make this point, as we discussed at several of my meetings this week in West Virginia the energy boom that is happening there and it’s positive implications for jobs, manufacturing competitiveness and wealth for our entire country. This optimism others have for us was perhaps eloquently expressed in a quote from one of my heroes, Margaret Thatcher, who died this week. “There are significant differences between the American and European versions of capitalism. The American traditionally emphasizes the need for limited government, light regulations, low taxes and maximum labor-market flexibility. Its success has been shown above all in the ability to create new jobs, in which it is consistently more successful than Europe.” I do wonder—would she say this today?
In my research reading this week, I saw the response of a veteran technical analyst to a client question wondering if there was another historical period in which defensive strategies led the rally, as has been the case so far this year. His response was in all his decades he couldn’t recall such a period and promised to do some work on the question. Now, should we react to this by just saying hmm, and go off to lunch? I would suggest the market is either telling us investors fear a general market correction as well as being out of the market so are using defensive names to be invested conservatively after a strong year-to-date rally (when the market was up 10%, we all agreed we shouldn’t annualize that number); the defensive rally is heralding a correction for the fourth summer in a row; or perhaps defensive names (which feature our beloved dividends) are being used as a bond surrogate. I choose door No. 3. Investment strategist Ed Yardeni agrees with me. In his weekly blog, Yardeni notes government bond yields in the U.S., Germany, France and Japan have dropped to record or near-record lows following the Bank of Japan’s pledge to double its balance sheet over the next two years. Lower-rated credits have also benefitted from the global bond rally, most notably among the sovereign debts of the peripheral eurozone countries and high-yield bonds.
This has many investors scrambling to load up on even more stocks paying dividends. That certainly would explain why so-called defensive stocks have outperformed cyclical ones, since the former tend to have higher dividend yields than the latter. So technicians might have been misled by this outperformance to believe that investors were turning defensive when they are actually aggressively buying any shares with a yield. Strategas also notes (and in doing so, also agrees with me!) that the least-observed species on the buy-side is the enthusiastic bull; the most ubiquitous: the reluctant bull. Most are reluctant bulls, willing to play to defensive stocks and bond proxies but still-scared-to-death to buy cyclicals. The median forecast in Bloomberg’s April survey of economists expects growth to slow from 3% in the first quarter to 1.5% in the current quarter. That an overwhelming majority expects the trajectory of growth to slow should mitigate the risk of a significant near-term stock market correction, a view reinforced by the fact that market leadership is still defensive with only 29% of stocks reaching 20-day highs on Wednesday. As I visited West Virginia this week, I recalled the song that refers to the Blue Ridge Mountains. Almost heaven, perhaps. But one of the clients I met there had two Maltese dogs—now that would be heaven!
It’s too early to worry about inflation The finished goods PPI fell sharper than expected in March, although the core rate held at a stable and benign level. This should allow Fed policy to continue on its path; it’s all about the labor market right now and is not focused on inflation (except to the extent that PCE inflation is running below its 2% longer-run inflation target). Strategas says we still need to see the Fed’s liquidity turn into income before we have to worry about inflation. At the same time, this progression tells us what to watch for – namely employment gains—as proof that the inflation vs. deflation debate (which currently looks like a stalemate, as monetary & fiscal policy work at cross purposes) will be resolved one way or the other. Right now, the Fed is missing on both its mandates—unemployment is too high and inflation is too low (below 2%).
This should help Q1 GDP February wholesale sales surged, more than offsetting January’s decline, while business inventories—including manufacturing, wholesale, and retail—rose less than expected off a strong January. The data point to a significant pickup in inventory investment thus far in the first quarter versus the fourth quarter.
Shipments sending signal? The Cass Freight Shipments Index rose in again in March for the largest back-to-back increase since September 2004, suggesting strengthening of the economy in coming months. The report cautioned, however, that the increase might be temporary, as was the case in the prior three years when a spring pickup in the index was followed by a weaker second half of the year.
Washington sours consumer’s mood Michigan’s consumer sentiment index fell to 72.3, a nine-month low (excluding March’s initial read of 71.8 before rebounding later in the month) on “overwhelming negative’’ views of government economic policies. In fact, “references to all branches of the government have been more negative for a longer time (five months) than ever recorded,” the report said. Only 9% of respondents favorably rated the government’s economic policies in April, barely above the all-time low of 4%.
Retail sales slip They fell more than expected in March and earlier months were revised downward. March sales were held down by lower auto sales and gas prices, but sales ex-autos and gas were also soft on unusually inclement weather. According to Weather Trends International, March was the coldest in 17 years and had the most snowfall in 20 years.
QE unlikely to fix what ails small business The market liked what it read in the minutes from the latest Fed meeting—April’s weak jobs report reinforced comments indicating now’s not the time to think about letting off the gas—but QE to infinity’’ isn’t likely to help mom and pop shops. The NFIB’s latest survey says the most important problems for small businesses remain taxes and government requirements. Only 3% of small firms cited “finance and interest rates” as their biggest problem and a very low 4% said credit was harder to get. Meanwhile, even if you believe QE will have a material impact on demand, the % of firms citing “poor sales” as the most important problem fell to a 4½-year low of 17% in March.
All roads don’t lead to jobs For the first time in post World War II history, the peak level of employment recorded during the previous expansion has not been exceeded in four years. Most important, the year-over-year rate of employment change is decelerating sharply and is at 1.4% in the establishment survey and 0.9% in the household survey. If this deceleration continues, the risk of a recession will increase substantially in 2013, Dudack Research says. Job creation in the current cycle has also been concentrated within a few segments of the economy which include educational services, health care, leisure & hospitality, and professional & business services—sectors that generally don’t represent high-paying jobs.
Stress is everywhere, it seems Although some indicators have shown improvement in the U.S. economy, a study found 83% of workers can identify at least one thing that stresses them out in the workplace, up 10 percentage points over the previous year. For me, it’s close flight connections and running in my heels.
I know I’m not powerful, but people often remark about what a lady I am Another in so many great Thatcherisms: “Being powerful is like being a lady. If you have to tell people you are, you aren’t.”