Key Charts Heading Into The Weekend: Stocks, Rates and China

March 1, 5:00 pm EST

As we end the week, let’s take a look at some key charts …

We finish the week with stocks trading at 16.5 times the Wall Street estimate on 2019 earnings.

That’s cheap in an economy running at 3.1% growth (for full 2018) and with the with the 10-year yield back well below 3%.

Here’s a look at yields …

As you can see, this important line continues to hold in yields, from the run-up following the optimism surrounding Trumponomics.

And here’s a look at stocks …

The important trend in stocks that held in December is from the global financial crisis-induced lows of 2009. This describes the global economic recovery.  A break of this trend would have spelled trouble.  But as we know, policymakers have reminded us that they will still, even 10-years following the crisis, do whatever it takes to keep the recovery going (and stocks are an important driver).  With that, we have another nice “V” on this 10-year uptrend.

Next, we’ve talked about the Chinese stock market as a key clue in measuring China’s willingness to make the necessary concessions to get a trade deal done. 

We finish the week on the highs, now up 23% from the lows of January.

And here’s a look at the other key proxy on U.S./China trade … the Chinese currency.
In the chart above, the falling line represents a strengthening yuan versus the U.S. dollar.

China’s currency manipulation (i.e. weak currency policy) is at the core of the global trade imbalances that precipitated the global financial crisis.  With that, the currency is a key piece of the trade and structural reform demands from the Trump administration.

You can see how China has been maneuvering to pacify currency tensions over time:
1) They slowly allowed the currency to climb (against the dollar) following threats of a big tariff on China from Graham and Schumer (yes, Schumer) back in 2005.
2) When the global economic crisis hit, they went back to a peg to protect their ability to export.
3) They went back to a slow crawl higher as tensions rose, and people began to believe the developed market economies might be passing the torch to China for economic leadership.
4) It became clear that China can’t grow fast enough in a world where developed market economies are struggling. So, they went back to weakening the currency to protect their ability to export.
5) They strengthened the yuan when Trump was elected to try to ward off a trade war.
6) Trump wasn’t placated and tariffs were launched. They weakened the currency with the idea that a threat of a big one-off devaluation in the currency might create some leverage.
7)  After trying to hold-out, it has become clear that they need to get a deal done, as the economy continues to sink.  They’ve been walking the currency higher again – a signal, along with stocks, that they are willing to make aggressive concessions to get a deal done.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
We May Be In The Early Stages Of An Economic Boom Period

February 28, 5:00 pm EST

We end the month of February today, continuing the big recovery for stocks.

After a decline of 10% in December.  We were UP 9% in January and UP 3% in February.

As we’ve discussed, the sentiment data is volatile and can take a hit when stocks fall, but it takes more sustained declines to damage the fundamental strength of the economy.  Still, the media and Wall Street are good at exaggerating the downside.  And with that, we’ve had expectations on economic data (as well as the earnings data) dialed down.  That’s good, because it sets the table for positive surprises, and we had one this morning.

The fourth quarter GDP number came in hotter, at 2.6%.  The consensus view was for 2.3%.  So here’s what full year 2018 looks like …

Q1: 2.2%
Q2: 4.2%
Q3: 3.4%
Q4: 2.6%

This gives us an average annualized growth of 3.1%.  The average annualized growth coming out of the Great Recession (pre-Trumponomics) was just 2.2%.

Below is what that growth has looked like against the long-term trend growth, dating back to 1947 (long-term trend growth = 3.2%).
So, we are finally approaching trend growth in 2018.
What were the experts thinking as we entered last year?

The Fed and Wall Street were looking for 2.5% growth. They undershot.

For 2019, the Fed is looking for just 2.3% growth — that was adjusted down in their December projections as they were witnessing the sharp decline in stocks.  A Wall Street Journal poll of economists back in December also showed a 2.3% growth forecast for 2019.

Again, the bar has been set low.

With that in mind, consider this:  The next big pillar of Trumponomics is a trillion-dollar-plus infrastructure spend.
Just as expectations have been dialed down, this is where we could see a real economic boom kick in, especially if we get a deal on China (clearing that drag on sentiment).
We’re already well overdue for an economic boom period.  Forperspective, let’s revisit this look at growth following the Great Depression and growth following the Great Recession …
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Expect Oil Back To The $70s, Soon

February 27, 5:00 pm EST

Yesterday Trump talked down oil prices.  Today oil prices came right back.

We’ve had a full recovery in stocks from the sharp declines to end the year.  Will oil prices also have a full recovery, back to the mid $70s?

My bet is yes, maybe much higher if we get a deal on China (and therefore an upside surprise on global growth).

Let’s take a look at this oil/stocks relationship.

You can see in the chart above, stocks and oil went down together. This is no coincidence.

Remember, a trigger for the decline in stocks from the top (October 3rd) was the implication of the Saudi Crown Prince in the murder of the journalist, Jamal Khashoggi.  Oil topped the same day, and then accelerated the day Trump spoke with the Saudi Crown Prince on the phone on October 16. Oil opened that day at $72 and hasn’t seen the level since (forty-three days later it was trading at $42).

With that, as I’ve said over the past several months, while the Fed always likes to exclude oil prices in their formula for measuring inflation, oil prices matter (a lot).  They mattered a lot in 2016 when oil prices crashed to $26.  That set off deflationary fears around the world and led to over $12 trillion in negative interest rates on global government bonds – and a response from global central banks.

So now we have another response from the Fed (and global central banks) — responding to stocks and the deflationary pressures of lower oil.

And now, importantly, the threat of sanctions on the Saudi government have now passed (which was a danger to global markets).  Trump settled on sanctions that exclude the Crown Prince and broader government.

With that, I suspect, this move above $55 in oil will sustain and lead to a catch up of the orange line in the chart, to the green line in the chart.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
V-Shaped Recovery In Stocks, V-Shaped Recovery In Sentiment

February 26, 5:00 pm EST

Jay Powell (the Fed Chair) is on Capitol Hill this week, giving his semi-annual testimony to Congress.  He reported today to the Senate Banking, Housing and Urban Affairs Committee.  Tomorrow he will sit before the House Financial Services Committee.

Remember, it was on January 4th that the Fed marched out Powell, Yellen, and Bernanke at an economic conference to reset the market expectations on monetary policy (moving from a four rate hike forecast for 2019 to a ‘wait and see’ approach).   In response to the stock market drubbing of December, it was a clear message that the Fed is done raising rates.

With that, there was nothing new today (nor should there be tomorrow, from Powell).  The Fed will do whatever it takes to keep the economic recovery going.  At the moment, that means promoting stable, low rates and a flexibility to do whatever is necessary.

Remember, we’ve talked in recent weeks about some of the negative economic data hitting (from December), that reflects the souring of economic sentiment from the sharp December decline in stocks.  But as I said, given the sharp V-shaped recovery in stocks we’ve seen since, we should “expect this data to bounce back just as sharply.”  We’re getting a taste of it this morning.

February manufacturing data from the Richmond Fed came in with a huge positive surprise.  And the consumer confidence index followed a decline in January with a big upside surprise in February.

We have a V in stocks.  And you can see the V in the data …

We’ll get the first look at fourth quarter GDP on Thursday (which will later be revised twice).  The market has been looking for 2.5% which would give us better than 3% growth for the full year 2018.  That’s “trend growth.”  And for perspective, for those unable to block out the media and political noise, that’s nearly DOUBLE the average growth of the past ten years.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Stock Market Strength Is Broad-Based, Finally

February 25, 5:00 pm EST

As we ended last week, we talked about the important signals given from Chinese markets on the prospects of a U.S./China trade deal.

Chinese stocks and the Chinese currency have been signaling China is prepared to make the necessary concessions to get a deal done.

We opened the week with more positive news on that front.  That has driven the S&P 500 back above the December 3rd highs (just before the market collapsed 20% in 15 days).

So we’ve now had a full recovery of the December losses.  But we remain 5% off of the all-time highs.  Where do we go from here?

Let’s take a look at the breadth of participation in this recovery for stocks, for clues. As we know, by design, the big market cap stocks contribute significantly to the performance of the S&P 500 (a cap weighted index).  With that, in recent years, we’ve had booms in the tech giants that have masked weakness across broader stocks.  It has been a market of some winners, and many losers.

That dynamic is changing.  As of Friday’s close, if we looked at the equal-weighted S&P 500 index, it was up 14%.  That’s a straight average performance of every constituent stock in the index.  That compares to plus 11% for the cap-weighted index.  This is the benchmark index we always hear about — deemed to be the proxy on global economic health and stability.

So what does the outperformance in the equal weighted index tell us?

It tells us that finally there is broad-based participation in the stock market.  And I would argue, it’s telegraphing a real-broad based economic boom, supplanting the “winner takes all (gutting of industries) boom” we’ve seen over the past decade (i.e. the rise of the big tech “disrupters” thanks to regulatory negligence).

A more broadly followed breadth indicator, the advance-decline line, shows the number of stocks advancing versus those declining.  And that indicator is hitting record highs.  This indicates a healthy stock market, not a topping stock market.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Chinese Stocks And The Yuan Giving Signals On A Trade Resolution

February 22, 5:00 pm EST

As the anticipation has grown on a structural reform agreement between the U.S. and China, we’ve talked about what might be the leading indicators that China will make the necessary concessions to get something done.

Remember, by the end of last year, much economic data in China was running at or worse the 2009 levels (the depths of the global economic crisis).  Clearly, they are in trouble.  As for Chinese stocks, an ugly bear market of was triggered in early 2018 when Trump’s rhetoric turned into action.  He slapped tariffs on washing machines and solar panels (a signal of bark and bite).

But as we know, by December the spiraling data in China also began taking a big toll on global markets.  With this, we’ve had responses from global central banks, including in China.

Now, Chinese stocks have been important to watch, for clues on: 1) are they doing enough to stimulate the struggling economy, and 2) (more importantly) are they taking serious steps to get to an agreement on trade with the U.S.?

With the above in mind, Chinese stocks bottomed on January 4th. That was when China and the United States announced they would hold trade talks in Beijing that following week.  That announcement represented the re-opening of trade talks, and the potential of an end to the trade war – which was a welcomed relief signal.

Chinese stocks have since represented an important signal in the recovery in global stocks.  On that note, the Shanghai Composite is now up 15% from the January 4th bottom. So, the signal has been good.  And as you can see in the chart below, we’re trading through the 200 day moving average (the purple line).

Another spot we’ve been watching in my Pro Perspective notes has been China’s currency.

China’s currency (the yuan) ends the week near its strongest levels since July.  This is China’s attempt to show the Trump administration that they are willing to make concessions on the all-important currency (the tool that has driven the massive trade disparity and wealth transfer of the past three decades).

As we head into the weekend, we have these two “leading indicators” supporting what has been maybe the most optimistic tone we’ve heard yet on an agreement.  It was announced this afternoon that the head Chinese trade negotiator would be extending his trip to Washington through the weekend.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Expect December Data To Recovery Just As Sharply As Stocks Have

February 21, 5:00 pm EST

We’re seeing some more December economic data that reflected the souring of economic sentiment from the sharp decline in stocks.

It started with retail sales last week. Stocks dipped immediately on the bad data, which proved to be a valuable buying opportunity. Today the bad number was December durable goods. These tend to be large investments that reflect optimism and these expenditures become the first to be delayed when that optimism wanes.

But less than two months later, and we have the v-shaped recovery in stocks. Expect this data to bounce back just as sharply.

We continue to get signals that some form of agreement will come from the latest round of U.S./China talks. As we’ve discussed, some of the best signals are in the commodities markets.

Remember, to end last month, we talked about the setup for a big run in commodities this year. Crude oil was up 20% in January. It’s up another 5% already in February. Copper was up 6% in January. It’s up another 4% this month. And copper is the commodity known to be an early indicator of turning points in the economy.

With this in mind, assuming we get resolution on China, and a continuation of trend growth in the U.S., we should expect this commodities rally to be in the early stages. And that should make emerging market stocks among the most attractive on the year. At the moment the MSCI emerging markets index is performing only in-line with the big developed stock markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

The Amazon, Walmart Gap Is Officially Closing

February 18, 5:00 pm EST

We had a big earnings report from Walmart today.

Last summer we talked about the huge divergence in the performance of Amazon (the world’s biggest company by market cap) and Walmart (the world’s biggest company by revenue).

Let’s take another look …

As we discussed, the market was pricing Amazon like a runaway monopoly — killer of all industries, especially retail.  And the perception has been that Walmart was destined to become another rise and fall story of a dominant American retailer.

But there was a clear and new catalyst that entered. Trump had made it very clear that he was, not only looking to balance the playing fieldglobally, but also domestically.  And that meant, the tech giants were due for some regulatory headwinds.  Amazon has been in the crosshairs, and still is.

As such, as I said last summer, this chart below was becoming the proxy for the domestic “rebalancing” — where the foot is being lifted from the jugular of the old economy survivors.

 

 

With today’s big Q4 earnings report from Walmart, we now have this chart.  

As you can see, the jaws have closed, albeit mostly driven by the resurgence of Walmart.  This spread trade was good for about 25% since June.  Amazon was 4.3 times the size of Walmart.  Now its about 2.5 times as big.

And this convergence should continue to have legs, not just because of the pressure from Washington on Amazon, but also because of the competitive moves made by Walmart, that may be finally garnering some respect on Wall Street.

Walmart has been aggressively investing in online. They bought Jet.com in 2016, an American online retailer.  That same year they took a large stake in the number two online retailer in China, JD.com.  Walmart now owns 12% of JD.

JD.com already has a big share of ecommerce in China.  They are number two to Alibaba, but gaining ground due to some clear competitive advantages.  JD owns and controls its logistics infrastructure, and does quality control from the supplier to delivery.  And unlike Alibaba, JD sources product to its warehouses to fight the counterfeit goods risk – a big problem in China. JD has 500+ warehouses around the country, and they now source product and service customers from one of the 433 Walmart stores in China.

So Walmart is positioned well to take advantage of the growth in the middle class in China.  Amazon has yet to find its way in China.  It has about 1% market share.   Add to this, Google came in last year with a $550 million investment to help position JD to challenge Alibaba and Amazon on a global scale.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Key Charts Heading Into The Weekend … Watch Oil, EM

February 15, 5:00 pm EST

Stocks end the week on a strong note.

Let’s take a look at the charts on key global markets as we head into the weekend.

Here’s the chart of the S&P we looked at earlier this week.  U.S. stocks continue to lead the way as the global risk proxy.   

Crude oil closes the week near three-month highs.  This one looks like a run back to the $70s is coming.  Like the last runup from the $40 to the $70s in oil, people are (again) starting to convince themselves that there is a supply glut and that demand somehow isn’t strengthening with global economic growth near the best levels in a decade.  A U.S./China deal is a catalyst for a lift-off in commodity prices, including oil … 

The most important chart is this one…

With the Fed now in a ‘wait and see’ position, we’ve had the most important interest rate market in the world (the U.S. 10-year yield) back off from 3.25% to 2.66%.  With inflation tame and economic data solid, the interest rate market has gone from a headwind to a tailwind (for global risk taking) within just the past six weeks.

That makes this next chart (of Emerging Market stocks) one of the most compelling.  We have a big technical breakout this year, though the EM index has been relatively quiet this week, despite a very strong U.S. stock market.  This may be the chart to watch next week… 
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
December Data Reflects Sentiment Storm, But Sets Up For Downgrades and Positive Surprises

February 14, 5:00 pm EST

A big miss on retail sales this morning sent stocks sharply lower, initially.

This type of reaction presents a perfect opportunity to add at cheaper levels.  Remember, this is old data, from December (delayed due to the government shutdown).  And we know what was going on in December.  Stocks were hammered.  The government was heading toward a shutdown (which happened toward the end of the month).  And the Fed raised rates right into it.  It was a sentiment storm.

What is significantly correlated to sentiment?  Retail sales.

Here’s a look at the dip in both …

 

 
The number this morning has already triggered downgrades in fourth quarter growth estimates.

The good news:  This will also further drive down expectations for Q1 growth.

I say good news, because these sentiment driven indicators have a long history of short-term swings, and can bounce back very quickly.  Remember, since December, we now have a near full retracement in stocks, a Fed on hold (and a  more acommodative global central bank stance), and a somewhat more optimistic geopolitical outlook.

So, we’re setting up for positive surprises in the economic data for Q1.  Positive surprises are fuel for stocks.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.