Paulsen's Perspective
UNCERTAIN Undertow
Since the 2008 Great Recession, economic and investment uncertainties have been persistent and pronounced. The shocking depth of the last recession during the post-war era (the annual decline in real GDP growth had never been lower than -3%—until 2009—when it fell nearly 4%), its subsequent subpar recovery (real GDP growth has averaged only slightly more than 2% annually, a level which was traditionally considered the “stall speed” during past expansions), the wild actions of policy officials (Cash for Clunkers, TARP, a zero Fed funds rate, Quantitative Easing, and Modern Monetary Theory)..
Offhand Observations
A lot of moving parts of late. Record high stock markets with near record-low bond yields? A re-inversion of the yield curve. A pop in the U.S. manufacturing industry. Blow-out job numbers at full employment. Impeachment—Not. A botched Caucus. Brexit—Done. And, a Pandemic! Eh, just another day at the office…
Introducing The Intra-Market Volatility Index
Volatility has always been important when investing. It is one of the most widely accepted qualifiers of risk. All investors prefer a steady-return stream rather than the anxiety which comes with irregular and less predictable returns. But often, volatility provides financial signals.
Is Business Investment Alarmingly Weak?
Today, it was reported that fourth-quarter U.S. real GDP growth was 2.1%, nearly in line with expectations. However, business investment spending declined for the third consecutive quarter, continuing to raise fears that companies are pulling back and it is only a matter of time before they also reduce employment, sending the economy into a recession.
Will The ZONE Show Some ZEST?
Investing overseas has mostly been a black hole through this bull market. Price momentum remains terribly weak for international stock markets and this has given investors pause every time they consider reallocating some assets offshore.
When “Risk” Is Not As Risky?
Extraordinarily low bond yields—often negative bond yields outside the U.S.—have significantly elevated investor anxieties, leaving the impression of facing a high-risk, low-return world. Consequently, during much of the contemporary expansion, the existence of very low yields has pushed several investors toward a more conservative portfolio allocation.
Positive Until PRESSURE
Investors are wondering what will ultimately crack this stock market. Its rising trend of late has improved investor sentiment, which is not surprising given the abject fears evident last summer about an imminent recession. While sentiment has recently turned positive, it hardly seems broadly optimistic or ridiculously bullish.
Profits Please?
Geo-political conflicts, an oil crisis, impeachment drama, and an upcoming presidential election are all currently rattling the stock market. Yet, what really matters for stocks this year is profits. For the stock market to make sustained progress in 2020, companies’ bottom-line performance needs to show renewed life.
Super Cycles
Including those who are bullish for this year, few expect stocks to continue delivering superior returns during the next decade. The economic expansion and bull market are simply too long in the tooth, and valuations too extended, to produce another decade of solid results.
2020 Outlook?
Uncharted Waters! That is the overwhelming impression entering a new year in the midst of the longest economic expansion and bull market in U.S. history! After all, every day is now another record performance as investors are forced to travel where no man or women has gone before.
A Profits POP?
Economic reports have improved in recent months. In the U.S., job creation has remained healthy, consumer and business confidence measures have improved, housing activity has surged, and the Markit Manufacturing PMI survey has risen in three of the last four months.
A New Bull Market?
The S&P 500 did not suffer a bear market last year. At least not by the conventional definition of a 20% decline. However, it was razor close—dropping 19.8% from its highest- to lowest-daily close. Given that, in every way except for -0.2%, the U.S. stock market did suffer a Bear last year, how does its 2019 rally compare thus far to the average “Bull Market Rally?”
Maybe Valuations Are Reasonable?
Since the early 1990s, with only a brief exception at the worst of the 2008-09 bear market, the U.S. stock market valuation has been considered “high” to “ridiculously high.” This is illustrated in Chart 1, which shows the Shiller CAPE Price/Earnings (P/E) multiple since 1900.
Small Biz Feeling Better About Profits?
The November NFIB Small Business Optimism Index rose by a healthy amount this morning. Among the 800 small companies surveyed, there were solid gains across an array of different business trends.
What’s Wrong With LOW Yields?
Are incredibly low yields a signal of imminent peril and a clarion call for caution? Or, alternatively, could they represent an amazing investment opportunity?
A New Recession Gauge
Tomorrow is another “Payroll Friday” and, after a disappointing ADP employment report yesterday, Wall Street will be watching for any indication that businesses are pulling back on job creation.
Unused Capacity?
Based on the calendar, both the economic recovery and bull market are the oldest in U.S. history. Other measures also support this view: 1) the unemployment rate is below 4%, suggesting the job market is at full employment; 2) compared to long-term benchmarks, both the U.S. stock market and bond market are richly priced; 3) several global bond yields are negative; 4) central bank balance sheets have been abnormally expanded; and, 5) the current U.S. federal deficit (as a percent of GDP) is one of the largest non-recessionary deficits of the post-war era.
Cyclical Stocks?
True to their name, cyclical stocks are volatile. They are not to be used in big doses, they are not for the faint of heart, and they are not to be “bought and held!” The overall stock market and therefore most portfolios are exposed to some cyclicality. The question is always, “how much?” While it is admittedly challenging, well-timed tilts away or toward some cyclical sectors can add handsomely to total portfolio performance.
Discounted Destiny?
The dividend discount model is a popular, conventional method of valuing a stock using the present value of its future dividend payments. The two major components comprising this valuation approach are earnings (from which dividends are paid) and the bond yield (or discount rate used to determine the present value of the future dividend stream).
Powell’s PRESSURE?
After a tumultuous year trying to ignore the president of the United States’ constant public criticism, Federal Reserve Chairman Powell reported during his testimony yesterday, “Monetary Policy is in a good place!”
If The U.S. Succeeds… Buy Foreign!
President Trump is focused on improving “fair” trade. He has renegotiated several U.S. trade agreements aimed at making U.S. producers more competitive, reducing significant U.S. trade deficits, and ensuring the U.S. dollar is priced appropriately.
A "Dollar Downer?"
Although it has been essentially flat since early 2015, dollar strength in 2019, in combination with a slowdown in the global recovery, has been particularly hurtful for the U.S. economy.
We Need Some Manufacturing Momentum!
Tomorrow is the monthly jobs report. It’s always widely anticipated since it frequently moves the financial markets. Moreover, it concludes a week that has been filled with potential blockbuster events, including significant earnings reports, ongoing official trade-war commentary, a Fed decision, the elimination of an ISIS leader, and a formal Congressional presidential impeachment inquiry.
Cyclical Scarcity
Scarcity is a good attribute for an investment. A limited supply tends to curb downside risk and fuel upside price potential once the asset is in vogue. In the stock market, scarcity is often associated with a temporary restriction (e.g., an oil crisis) or with a company possessing a monopoly of an innovative must-have product. For an investor, a scarce asset that becomes popular when most don’t own it is a beautiful thing!
A Crescendo Of FEAR… And… CHANGE Afoot?
Despite a significant stock market rally, this year has been beset by escalating recession fears. The list of worries include broad-based slowing in the global economic recovery (centered in the manufacturing sector), a never-ending trade war, persistent political and geo-political drama, a chronic decline in global bond yields, a surge in negative yielding bonds, an inversion in the U.S. yield curve, and an expansion that recently celebrated a birthday which makes it the oldest ever in U.S. history!
Too Much Courage Or Fear?
The underlying character of the financial markets is often a good indication of investor sentiment. It takes courage (or stupidity in retrospect?) to buy certain assets, while the purchase of other investments is driven mostly by fear. In this fashion, a good read on whether the stock market is being propelled by excessive hope or angst can be obtained by monitoring the character of its leadership.
A “Mini-FANGs” Swap?
Despite a slowdown in old-era business investment (manufacturing) during the last year, new-era business spending (information processing equipment and intellectual products) remains healthy. This argues for continued leadership among technology stocks.
ISM or CYC?
The ISM manufacturing and services reports have significantly increased recession anxieties and have been wreaking havoc with the stock market over the last couple days. And, who knows, the real pain for equity investors may come tomorrow morning when the monthly payroll employment numbers are released?
Preemptive Policy
One of the features arguing for an extension of this economic recovery and its corollary bull market is aggressive and “preemptive” economic policies! Hesitancy has frequently spelled trouble during past economic expansions.
Earnings Set To POP?
Several factors helped the stock market resume a climb to marginal new highs this year. Valuations came down, inflation pressures moderated, yields collapsed, and policy officials became universally supportive. However, a key element remains elusive and, without it, a further significant advance in this bull market seems doubtful.
Private Sector Press Conference
Yesterday, the Federal Reserve held one of its regularly scheduled press conferences, which are “must see TV” for investors. We all tune in to hear what the Board thinks about the economy and what they plan do about it.
A Shift In Leadership?
In the last couple weeks, the stock market has undergone a significant shift in leadership. Perhaps it is the long-awaited swing from “growth” to “value,” but so far it appears more like a shift from “defensive” to “cyclical.”
A Silent Productivity Miracle
Lost in the roar surrounding the trade war, the inverted yield curve, an expanding wave of negative global bond yields, and persistent recession chatter, is a “silent U.S. productivity miracle!” Largely AWOL in this expansion until recently, and despite being barely acknowledged due to widespread recession fears, productivity has finally arrived, adding yet another wildcard to the remaining years of this economic recovery.
A Low-Vol Signal SWITCH!
Investors have been playing defense in recent months, piling into bonds despite low yields, sleeping well at night with gold purchases, staying with the perceived safety of U.S. stocks, avoiding risky small cap companies, and buying traditional low-risk sectors including Utilities, Consumer Staples, and REITS.
Stock Market STIMULUS!
What’s driving the stock market? Trade wars, inverted yield curves, Presidential Tweets, manufacturing weakness, negative yields, Fed confusion, earnings woes? Yes, all the above!
Segmenting Seasonality
Investors have long recognized that the stock market often does better in certain months compared to others. That is, stocks have a seasonality which can be exploited. The January Effect, the Santa Rally, “Sell in May and Go Away”; and, the carnage created by August, September, and October are appreciated and feared by “seasoned investors.”
Will Stimulus “Strike Out”?
Many increasingly fear the global economic recovery is in severe peril because overused economic policies have become futile. Bloated central bank balance sheets, large fiscal budgetary fiascos, and the unprecedented global phenomenon of widespread negative bond yields leaves an impression that economic help is spent!
Positive Economic Surprises With... ANGUISH!
The stock market is re-testing its August 5th collapse low, the U.S. 10-year bond yield is nearing its lows of this recovery, yet another yield curve inversion (tens vs. twos) was breached this week, silence from the Federal Reserve, negative yielding global debt now totaling more than $15 trillion, an escalating riot in Hong Kong, and trade-war negotiations hanging by a thread as ongoing communications are now only by phone! Whew, it’s tough being a bull. Maybe foolhardy?
Investment Bifurcation
Adding to current anxieties are the growing fears that businesses may be curtailing spending plans. Real nonresidential investment spending declined in the second quarter for the first time since early 2016. However, this decline was due entirely to ‘old-era investment spending’ while ‘new-era spending’ remains healthy.
Conflicting Counsel?
This is why financial market prognostications are so difficult and why some believe fruitless! Currently, two recession indicators – both with equally impressive accurate historical prowess – are giving entirely contradictory signals? As shown by the accompanying charts, the yield curve has inverted while fiscal stimulus has been expanding. At least since 1965, this has ‘never’ happened.