'Stop killing volcanoes to make lava lamps'
This was some protestor’s message that a jovial advisor shared on his phone in my visit to Phoenix and Scottsdale this week. But worries dominated. At my 10th annual forecast meeting for Phoenix advisors in Scottsdale, we debated “What can go wrong??” Hong Kong, deflation and growing national debt were some long-term concerns voiced by the gentlemen. So I gravitated toward the ladies. “For 10 years I’ve enjoyed the conversation about your shoes.” At a client event, more worries, but a philosophical lady. “Women buy lipstick when the market goes down.” This was a cool event with a mixture of boomers and millennials. I asked a young professional couple what they’re buying in this bull market. Waiting to hear about some big-ticket items, they instead are conservative, saving for a “rainy day” and, along with several other guests, ESG investing. The stumbling start to what usually is the market’s best month looks to be a typical consolidation after a strong run-up—and may be done after this morning’s strong jobs report (more below). With 70% of S&P 500 components above their 200-day moving average, financials and small caps breaking out, daily new highs running far above new lows and bear-bull sentiment at neutral, technical and trend indicators continue to be bullish. And there’s ample scope for more buying: despite their best 3-week run of inflows in nearly two years, equity fund flows for the year are still a net negative $189 billion.
“Recession” was brought up in most of my meetings this week. “Can discussion of recession be a self-fulfilling prophecy,” a question I’ve heard before, as Google searches for “recession” have been elevated in recent months. “Hogwash” is my constant reply. The American consumer wants to consume! It’s the holidays and we are fully employed! The S&P is on pace to gain 25% this year, which would be its best year since 2013 and third-best this century. But looking back over the last two years, the S&P has made little progress. Will this fourth attempt to break out of a 2-year trading range be a charm? If so, FundStrat says investors could be in for a surprise as the last three times since World War II when equities broke to the upside after “going nowhere” for 20 months, the market experienced 50% gains over the next 24 months! A recent UBS survey of more than 3,400 global respondents finds that wealthy people around the globe are hunkering down, with 25% of their average assets in cash. They’re expecting a significant drop in markets before the end of next year, with a U.S.-China trade conflict their top geopolitical concern and the upcoming presidential election (and possible Warren win) another. But trade angst has been around so long that the surprise is likely to be to the upside, and history shows markets typically don’t pay much attention to elections until a few months beforehand (though admittedly, California’s moving its primary up to Super Tuesday means two-thirds of delegates will be committed by early March). With CEO confidence near recession lows and 5-year earnings growth expectations dramatically lower, I’m thinking all this conservative positioning may be setting us up for a melt-up that gets us to our 3,500 year-end 2020 forecast early.
I’ve got a new survey question as I travel, a shout-out to Joe Biden’s new bus tour theme, and wonder to whom his campaign is speaking. “What does ‘malarkey’ mean?” In Phoenix, neither the millennial waitress (at my hotel) nor the boomer at our client meeting had a clue. At (another annual) breakfast event, more blank stares when I asked what “malarkey” means. But one advisor says his Canadian friends use that term often. (Biden is speaking to Canadians?) We talked about the alive and well Wall of Worry. One seasoned advisor suggested, “Just lay on the couch like me. Nothing bad ever happens.” This clearly was a mostly conservative crowd, as politics came up again. An advisor who grew up in Staten Island keeps in touch with his high school friends on Facebook reports that “90% voted for Trump.” If college were free back then, he would run for class president with “Kegs for Everyone” and the “8-year plan” to drag out the college experience. Ho! Ho! Ho! But who buys lava lamps???
- Holiday spirits November nonfarm jobs blew past consensus, aided somewhat by the return of striking GM workers. Along with upward revisions to jobs and wages in prior months, the 266K increase nonetheless bolsters the case that a labor market as strong as it’s been in 50 years should help consumers power the economy through trade, manufacturing and geopolitical uncertainties. Michigan’s preliminary read on December sentiment reflected this optimism, jumping to a 7-month high.
- Santa’s been busy Cyber Monday sales surged nearly 20% year-over-year (y/y) to a record high, and the number of consumers shopping online and in stores over the 5-day Thanksgiving holiday jumped 14% y/y to 189.6 million, according to a various reports. Also for November, light vehicle sales rose the most in six months.
- We are a services economy, after all The Institute for Supply Management (ISM) said services activity moderated in November off October’s surprisingly strong showing but easily remained in expansion territory. Markit’s separate services survey rose again, and employment and new orders in both gauges picked up.
- Manufacturing could use a trade deal November’s ISM contracted a fourth straight month to its second-lowest level since January 2016; only five of 18 industries expanded. But the more U.S.-centric Markit survey that puts more weight on forward indicators rose to a 7-month high. The two gauges tend to trend together over time, suggesting the ISM could soon turn up. Activity in much of the rest of the world already has improved, with the global PMI in November topping 50 for the first time since April.
- Capex could use a trade deal Core capital goods orders, a gauge of capital expenditures (capex), declined in October by the most since December 2016. Private sector construction spending, a related indicator representative of investment in physical structures, fell 1.8% y/y. The Atlanta Fed said 12% of companies it surveyed postponed or cut capex plans due to the trade war, double the number from a year ago, while Duke University’s survey of CFOs put capex expectations at a decade-low.
- Housing headwinds Despite a lift from lower mortgages rates and moderating price increases, housing still confronts structural issues. Deutsche Bank notes the homebuyer’s median age has risen from 31 to 47 since 1981 for a variety of reasons, including an aging population, high student debt levels and tighter lending standards. Another drag: declining residential mobility—10% of the population move to a new home every year, half the pace a few decades ago.
Does fear of Warren make Warren more likely? Bernstein wonders if Warren risk might be “reflexive”—that is, might the pricing of the event (a sell-off on fears that she will win) raise the odds of the event? Many prominent investors have gone on record with predictions of a “Warren drawdown” as early as February, given her anti-wealth and anti-Wall Street rhetoric, and history shows a weak equity market tends to be bad news for the incumbent party.
Just sign and thrive? Blaming trade disputes for slumping business confidence and capex, FedEx CEO Frederick W. Smith offers a simple solution: “We believe re-embracing (the) Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership and passing the new U.S.-Mexico-Canada trade agreement would reverse these trends in short order.” Empirical Research isn’t so sure. It says the correlation between business sentiment and capex is weak, the capital intensity of the U.S. market is in a structural decline and a trade-war resolution may actually limit more capex by discouraging reshoring.
Hey, 1881 is a lot of data points! Citing data back to 1881, Ned Davis says years ending in seven or zero are often a problem, while years ending in five, six, eight, and nine are usually strong. This is the so-called Decennial Pattern.