'Ain't no shame in a pushy broad'
Advisors in Chicago aren’t bashful! That’s where I traveled this week with one of my favorite female colleagues, a classy lady with spectacular shoes—from Milan! I’m jealous, as the selection in Pittsburgh has been seriously picked over. A male advisor had seen me on Maria Bartiromo’s morning program earlier in the week and wondered why I didn’t mention my shoes. Actually, I did argue on a recent Bloomberg appearance that most Americans haven’t been debating a shoe purchase because of trade war uncertainty. Indeed, I argued that tariffs and trade are the worries of market pundits, who have attributed any particular day’s up or down move to news on that front. These pundits note a report that the Trump administration says it will delay Oct. 1 tariffs to Oct. 15 “as a gesture of goodwill.’’ We’re getting excited about a 15-day delay in tariffs? Among the great seasoned advisors we met with were a mother/daughter as well as a father/son team. The all-women meeting got around to discussing politics, including Wednesday’s Wall Street Journal opinion piece, “Warren’s Assault on Retiree Wealth” (this article came up in more than one meeting) … whether a woman could beat Trump … a bold woman might … bold women are labeled “pushy” but not bold men … and we agreed that we all in that room are pushy women and there “ain’t no shame” in that.
All meetings this week discussed the strong rotation into value stocks and small caps since the month began. Indeed, Wolfe Research reports momentum stocks suffered a 6 times standard-deviation loss in this short period. And UBS notes from Monday through Wednesday, momentum sold off 10% while value rallied 7%, one of the largest 3-day momentum-value rotations in over 30 years. Factor-based trading is the hallmark of algorithmic/computer-based trading, which is estimated to comprise 90% of all volume in the market. Bloomberg’s article this week quoting Michael Burry, the hedge-fund manager who called the housing crisis (Christian Bale in “The Big Short,” great movie) was brought up at several of our meetings. Suggesting that passive investment may be the next bubble, he said: “The theatre keeps getting more crowded, but the exit door is the same as it always was.” The underlying question is whether this violent turn from large caps to small caps, “cloud’’ to semiconductor stocks and high P/E secular growers to low P/E value within sectors has legs. It coincided with a dramatic reversal in interest rates and Treasury yields, with the 10-year climbing nearly 40 basis in just seven trading days. Among client comments gathered by Fundstrat: “It seems like all sector and factor bets are now just a function of interest-rate moves” and “Suddenly, the market changed its mind about secular growth at any price." Third Seven doesn’t think the market is experiencing a massive rotation from growth to value as much as it is a negative momentum move. August was one of the worst months for cyclicals this year, and the spread between relative returns for value and growth has been exceptionally large, making some mean reversion normal, especially since value is coming off its worst January-August stretch in at least 33 years.
Still, there have been some encouraging signals on trade, some global green shoots (the first increase in Markit’s global manufacturing gauge in 16 months, more below) and ever-rising central bank dovishness—80% are now easing, the latest being the European Central Bank, which went all in this week. Extended value rallies came in 2013 and 2016 on China stimulus both years and the shock Trump victory in 2016—periods that coincided with an increase in global growth expectations. Research by Evercore ISI finds that interest-rate changes lead GDP growth by roughly 1.25 years, suggesting recession odds are low and faster growth is possible in 2020, a view the markets may be starting to price in. This week’s rally saw the Russell 2000 and the Dow Jones Transportation Average join other indexes in trading above all their moving averages, and the percentage of stocks with an upward-sloping 200-day moving average hit a high for the year on breadth and advancing volume that were as good as they’ve been since the rally off last December’s lows. From a contrarian positive perspective, estimated hedge-fund equity exposure is at lows last experienced during the 2008-9 global financial crisis, as is individual investor bearish sentiment. Renaissance Macro sees the S&P 500 potentially climbing as high as 3,300 to 3,500. (Our house call is 3,500 by year-end 2020.) One of our Chicago suburb stops was in Winnetka, a high net worth community in the North Shore. An advisor there calls it “Primrose Lane,” a charming, well-groomed community with impressive houses, where “friendliness is a way of life.” We saw no pushy women there. Of course, I’m a pushy broad. My Mister can attest, 35 years and counting.
- The labor market is tight Despite moderating payroll growth, employers continue to struggle to find and keep workers. The quit rate—workers voluntarily leaving because they’re confident of finding better jobs elsewhere—hit its second-highest level on record high in July, while job openings remained above the number of unemployed a 17th straight month. Jobs and worker confidence represent strong underpinnings to consumer spending, which continues to climb. Headline August retail sales rose more than expected, mainly on auto purchases, and already strong July sales were revised higher.
- Global manufacturing bottoming? Activity continued to contract in August but there were some tentative signs it may be poised to turn. Notably, the global PMI ticked up for the first time in 16 months to 49.5. While still close to its lowest level since October 2012, the uptick, if sustained, could potentially be a good sign as this gauge typically bottoms four months before the end of global economic slowdowns.
- Large-cap profit outlook climbs This week’s rotation into small caps may not reflect it, but contrary to meaningful downward revisions to small- and medium-sized companies since trade tensions reaccelerated in spring, earnings estimates for large-cap stocks are on the rise. They now stand at $177.10 for 2020, up from their previous highs ($174.44 on 12/6/18 and $174.45 on May 23).
- Small business mood worsens The National Federation of Independent Business monthly survey of small confidence fell again in August and has now weakened in six of the past nine months since peaking a year ago. Recruiting difficulties were a major factor, with a record 57% of respondents reporting few or no qualified applicants for openings. Despite the decline, the index remains high by historical standards.
- Will inflation give the Fed pause? This week’s CPI and PPI ran a bit hotter than most expected, with y/y core CPI jumping to an 11-year high. These and other recent inflation reports, including higher Q2 unit labor costs and August hourly wages, indicate price pressures may be building. While consensus expects the Fed to cut by a quarter-point next week, this news may give the Fed pause about possible future cuts.
- Will the slowdown continue into Q4? Possibly, based on the OECD U.S. composite leading indicator. It fell in July for the 15th straight month to its lowest level since November 2009, and was below 100 for the eighth straight month, indicating weaker than average economic activity. The annualized 6-month rate of change has been negative for a full year now, suggesting continued slow growth but not a recession.
Election watch Bold plans to combat climate change from leading Democratic presidential candidates would boost the federal commitment anywhere from $1.7 trillion to $16 trillion over the next decade to incentivize renewable energy, decarbonize the economy and expand regulation to make traditional energy production more expensive or illegal. While it’s unlikely the bulk of desired changes on the tax and spending side will occur given the need for legislative approval, a Democratic president can and most certainly would secure significant reforms through executive and regulatory action.
Admissions scandal parents might have benefited from knowing this It is undeniable that our nation’s public university system produces a lot of managerial and entrepreneurial talent. Strategas Research looked at where Fortune 500 CEOs went to college, and a remarkable 292 undergraduate institutions were represented; 23 did not attend college at all.
Trade war conspiracy theory I often kid that Trump and Xi probably have a deal but agreed to wait until closer to the election to announce it. An advisor this week theorized that Trump is letting Fed Chair Powell cut interest rates for the trade war, juicing the economy for a deal announcement around seven months in advance of the election. The art of the deal?