As is the case with Evergreen, our partner firm Gavekal encourages an environment of “opinion exchanges”. In the latter case, much of that stems from the inherent philosophical divergences regarding economics and politics between its three co-founders.
The post-Fed action in the bond market yesterday was impressive, yet left some begging for answers. If the Fed raised short rates yesterday and reiterated its plans for the subsequent five rate increases through 2018, shouldn’t the long-end be selling off? If it were only that easy.
The interplay between debt and income can be a difficult thing to understand. Here is a useful analogy. Imagine a hot air balloon lying on the ground preparing for take-off.
Since the election we’ve heard the rally in stocks characterized as a “Trump Trade” or a “reflation” trade. We think there is a really important element missing from this analysis that could change very quickly over the next several weeks.
The most recent CFTC commitment of traders report revealed little change in the historic long positioning of smart money bond investors.
The spread between 30-year US treasuries and 10-year US treasuries has fallen to just 60 bps which is the smallest spread in about 2 years.
While the myth that stock market returns are highly correlated to a country’s GDP growth rate has largely been debunked, there remains a strong, and intuitive, relationship between corporate profits and GDP.
In the month of January, the most important factor correlation to performance of developed market stocks has been dividend yield (DY).
CPI excluding food and energy (core-CPI) increased by 31 bps in January for the largest one month increase since March 2006. Headline CPI increased to 2.54% year-over-year which is the fastest growth rate since March 2012.
Equity returns and earnings estimates should presumably be related. It makes intuitive sense that if earnings estimates are increasing for a sector than equity prices for that sector should trend upwards as well. And this broadly holds up except oddly with the health care sector.
Just 44% of developed market stocks have outperformed the MSCI World Index over the past 200 days compared to 57% outperforming on average over the past 15 years.
The Boom-Bust Barometer (made famous by Dr. Ed Yardeni) is a simple, but effective, way of avoiding large drawdowns in the stock market. This indicator is calculated by taking the CRB Raw Industrial Price Index divided by initial unemployment claims.
Out of 24 developed market industry group, six currently look overbought in the short-term. Two come from the financial sector, two come from the technology sector, one from consumer staples sector (surprisingly) and one from the materials sector.
After underperforming in 2016, growth stocks have once again started to outperform value stocks in 2017. As the chart below illustrates, the S&P 500 Value Index consistently outperformed the S&P 500 Growth Index from 2002-2006.
A Bloomberg article (February 2nd) highlighted a recent survey of 400 executives whose overwhelming concern is talent scarcity.
The percentage of positive revisions to developed market sales and earnings estimates jumped over the last month, with an average of 76% of companies reporting better sales estimates and 70% reporting better earnings estimates.
The stronger dollar is flowing through into our purchasing power parity (PPP) CPI differential models. Overall against 18 currencies, the USD is overvalued against 12 of them on a PPP basis.
Over the past 10-years personal income in the US has increased at a 3.39% annualized rate which is the slowest 10-year annualized growth rate since the data began in 1960.
At long last the fund rating company, Morningstar, has decided to put mutual funds and exchange traded funds (ETFs) on a level playing field when it comes to fund ratings and comparisons.
The Conference Board’s Coincident-Lagging Ratio has done a pretty good job of identifying recessions since 1958. That is, until now. In each of the last eight recessions, the Coincident-Lagging Ratio bottomed near the end of the recession and was declining throughout the recession.
Over the past decade, global cyclical stocks and the dollar have tended to move in inverse directions. Whenever the dollar weakens, like in the first half of 2009 and the second half of 2010, cyclical stocks have tended to outperform the broader market.
Consolidated debt in the Euro Area fell to the lowest level in fours years, according to 3Q2016 figures released today.
Over the past decade there has been a very strong relationship between US 10-year treasury yields and the gold/copper ratio. As the gold/copper ratio increases (i.e. gold becomes more expensive relative to copper), yields have fallen to the tune of an -85% correlation.
There are fears that the world is on the precipice of turning back the clock on globalization. In some ways, the case can be made globalization has been retreating since the financial crisis. One of the strongest supporting data points of that argument is world trade data.
On 11/4/16, the 65-day correlation between between the S&P 500 and US 10-year treasury yields was as negative as it had been at anytime since June 2007. The 65-day rolling correlation was -30% compared to a 73% correlation that had occurred just a few months earlier in June.
For the first time since 2011-2012, inflation surprises are positive in many parts of the world. The Citi Inflation Surprise Index is at the highest level since 9/2011 in Asia-Pacific, it’s at the highest level since 10/2011 for the Eurozone, and it’s at the highest level since 5/2012 in the emerging markets.
As of the end of December, short interest–the number of shares investors have sold short on the NYSE–dropped to its lowest level since early 2014, even as stock market indices hovered at new highs.
It is somewhat hard to believe but oil prices are up nearly 90% over the past year. The past two times oil prices have increased this much year-over-year, US 10-year bonds rallied quite significantly. In 2008, oil was up over 100% in July and bond yields were hovering just over 4%.
The latest Commitment of Traders report (as of last Friday) highlights some extreme levels of speculation in several different assets.
The latest NFIB Small Business Survey was a blow out report if there ever was one. Small business optimism increased to 105.8 in December from 98.4 in November and well above expectations of 99.5.
‘Quality’ is one of the those terms in finance that if you ask three different investors to define you get four different answers.
Over the last month, the average European bank has outperformed the broad developed market by about 7%, with more than half of them registering double-digit relative outperformance.
For the past couple of months, and especially since the US presidential election, US financial stocks have been on a great run. On an equal-weighted basis, US mid and large cap financial stocks are up a scorching 16.7% over the past 50 days.
Since the U.S. election, small cap stocks (blue line) have advanced more than twice as much as large cap names (red line) and have more recently been consolidating gains after a very strong one month surge.
At least since 2003 (which is when our data on TIPS begins), the dollar and breakeven inflation expectations have had a negative relationship. Said differently, when the dollar strengthens (as it has done recently) inflation expectations tend to fall and vice versa.
The December Conference Board Consumer Confidence survey had some interesting results. One of the more noteworthy changes were in regards to equity price expectations.
Most of the time not a whole lot actually changes in the markets over the course of a month. For example, small cap stocks tend to outperform large cap stocks by a rather mundane 31 bps over the course of a month on average going back to 1996.
The Fed has communicated that the plan for 2017 includes three rate hikes. The market isn’t quite buying into that plan yet.
The British Pound is hovering near its one-month low of 1.23 versus the USD.
According to the Fed’s dot plot, the fed funds rate will be 2.125% be December 2018. This is about 40 bps higher than what the current Dec 18 fed funds futures contract is pricing in.
The US has outperformed the MSCI World Index by over 26% since the 3/9/2009 low while the rest of the developed world has dramatically underperformed.
The recent increase in interest rates have already hit the mortgage refi market and higher rates look like it may be a headwind to the overall housing market in the first half of next year.
Recent inflation fears have helped lead to a sell off in bonds. From a total return perspective, the 30-year US treasury has declined by 13% and the 10-year US treasury has declined by 6% over the past 100-days.
Fun fact of the day: the ECB’s decision to extend its asset purchase program to the end of 2017, albeit at a slightly slower pace than the current €80B per month, puts it on track to surpass the Fed’s current $4.4B level of assets sometime around next August.
The high yield spread over the 10-year treasury has synced up to changes in breakeven inflation.
The 200-day correlation between US stocks and the MSCI World Index is currently 45%. This is the second lowest level since 2008. The only time the 200-day correlation was lower was in July 2014.
The aggregate market cap of our entire developed world index, GKCI DM, has remained mostly in the range of $35-40T over the last few years, after surpassing the $35T level (previously reached in 2007) in late 2013.
The recent backup in yields is happening at an unfortunate time. In nominal terms, debt held by the public is at an an all-time high (approximately $14.3 trillion).
The Sentix Euro Break Up Index is on the rise again, up to 24.08 in the latest monthly reading (as of 11/30/2016).