The 'Land of Big Hair'
I traveled to New Jersey this week, with end-client and advisor meetings in the Atlantic City area. First at an Italian restaurant where I met Guido (like me, he’s a proud Italian), fielded a question about penny stocks, received several hugs and even a warm kiss on the cheek. What a welcome! Then an advisor meeting in which one dropped his cousin’s name—Kellyanne Conway (he can report that all is well with her marriage)—and started a political discussion. One gentleman argued, “I wouldn’t want him (Trump) for my little league baseball coach,” but likes his policies. (And again, the word “impeachment” was not uttered this week, although I heard yelling among the maids outside my hotel room about “quid pro quo.”) Investors don’t seem to be paying much attention, either, as the inquiry and hearings got underway just as stocks were rallying to new highs. Equity fund inflows jumped $32.5 billion the past three weeks, the biggest 3-week gain since February of last year. (Is Santa bringing a melt-up?) There’s ample scope for more buying as year-to-date outflows still stand at $189 billion (much of the year saw aggressive selling, while bond funds have attracted $432 billion), and $3.5 trillion sits in money market funds. (Is that a melt-up I see in Santa’s bag?)
New highs in the NYSE cumulative advance/decline line confirm the ongoing advance, with both growth and value styles trading well and contributing to broadening participation. (It sure looks like melt-up!) Equity markets continue to trend higher, defying the bears and those waiting for the textbook pullback from the October-November rally. Indeed, every down move has been met with buying, as the market keeps setting higher lows. And with this week’s minutes reinforcing that the Fed is unlikely to raise rates before 2021 and with money supply growing at twice the rate of nominal GDP (the Fed’s balance sheet has risen $300 billion since August), overall market risks over the next six to nine months are still very much skewed to the upside. Fundstrat is advising investors to remain focused on this up-cycle that has been developing all year rather than attempt to micromanage near-term pullbacks. (My view is “Amen, brother!” and then reassess after a possible melt-up, which should be obvious to us all.) The current technical backdrop for risk-taking is uniquely conducive to both growth and value styles as evidenced by the identical 4% 1-month returns for the Russell 1000 Growth and Value Indexes. Although value has rebounded from its relative low reached at the end of August, there is still room for it to outperform given the current valuation spread between it and high-priced momentum stocks. Seasonality remains strong, and fund managers’ growth expectations have totally flipped to the positive, according to a Merrill Lynch survey, matching similar positive inflection points for the markets in 1998, 2002 and 2009.
With copper turning up vs. gold and the yield curve recently hitting its steepest point of the year, the market seems to be affirming receding recession risks and a budding cyclical recovery. This has neutral-positioned Empirical Research thinking it’s risky to bet on a big multiyear value rotation amid improving prospects for what it calls “growthier” companies that produce monstrous free cash flows and faster growth during periods of economic acceleration. I wouldn’t say that the ladies’ hair was monstrous in New Jersey, but my local hosts still refer to their state along these lines. Being around these upbeat people, I reminisced about my high school and college years, when I teased my hair daily to get some volume. I thought it was pretty until my boyfriend (now the Mister) pointed out the people who were snickering (they were not!) as we walked by and foreigners speaking other languages (he can’t understand their languages!) who were disparaging my do. So I threw in my comb. Shouldn’t have. I’d have been a hit in the Land of Big Hair.
- Housing was debated at my New Jersey advisor meeting One suggested millennials don’t want to get married, have children and buy homes, while another said he’s noticed city apartment dwellers increasingly buying in the ’burbs. This week’s data gives a nod to the latter, as millennial buyer traffic kept builder optimism elevated near 2005 levels, led a fifth-straight monthly advance in single-family starts and permits, and helped push October existing home sales to near a 2-year high.
- My credit card is on overdrive The correlation between S&P 500 performance in Q4 and holiday sales has been very strong over the last 20 years, suggesting this season should see sales rise 5% or more. The market’s run has increased consumer net worth—which leads GDP growth by about half a year—by more than 10% year-over-year, ISI says. Its proprietary survey of retailers puts holiday expectations at a 9-year high, while various surveys (Bloomberg, the University of Michigan, Bank of America) show consumers in a holiday mood and ready to spend.
- Capex heading higher? The continued strong consumer and housing improvements are setting the stage for a new capital expenditures (capex) up-cycle in 2020, Goldman Sachs maintains. Notably, the capital goods component of the U.S. manufacturing ISM recently moved above 50 for the first time in a year.
- Manufacturing’s drag While there are signs factory activity is bottoming, manufacturing currently is hurting more than helping the economy. The Conference Board blamed several measures reflecting manufacturing weakness for October’s decline in its leading indicator index, which has now been negative three straight months.
- I thought Phase 1 wasn’t a big deal anyway? Uncertainty over the prospects for and timing of a skinny U.S.-China trade deal disrupted the equity rally this week, as both sides struggled to close out details. Still, Strategas Research reports client meetings are dominated by discussion about whether the outcome even matters for stocks, given that the S&P is near all-time highs despite two weeks of negative trade headlines.
- A low-growth rut That’s how the latest Organization for Economic Cooperation and Development forecast is being portrayed. It lowered projected global growth for this year and next to a decade-low 2.9%. It blamed weakened investment linked to the ongoing trade wars and related uncertainties.
Shout-out to dividends The spread between the median dividend yield for the highest-yielding quintile and the median S&P stock is the highest since the European debt crisis in Q1 2012, Jefferies shares. It notes an investor can pick up 226 basis points of yield over the S&P by owning the top quintile of S&P yielders, and this is at a time yield is scarce.
Shout-out to ‘Chocolatetown’ I finished the week in Hershey, Pa., and another bankers’ meeting. An annual stop, with friendly faces, two gentlemen approached me before my remarks to ask me about my millennial children—we had a memorable discussion about this generation last year (!). After the meeting, a lady stopped to check out my shoes, which she “looks forward to year after year.” I’m getting in the holiday spirit over here!
Forget misery. Find some eggnog! The so-called Misery Index, the sum of the unemployment rate and the yearly percent change in CPI inflation, fell to 5.4% in October, almost matching the most recent low of 5% during September 2015, which was the lowest reading since April 1956. Most Americans have never been less miserable, at least in terms of how they are affected by the performance of the macro economy.