FYI | Nov 27 2018
By Peter Switzer, Switzer Super Report
The headlines all share market investors should know or throw!
When I was a younger economics commentator, newspapers were miles more responsible than their modern online rivals. In those days, you didn’t make recession calls for clickbait reasons and we even used the R-word as an euphemism so as to not unnecessarily scare people.
I always saw that as a noble aspect of the fourth estate. But that was then and this is now and the word recession gets thrown around like a remote in a family living/TV room!
However the R-word headlines have some competing headlines out there so I thought I’d give you a sample of what you need to be thinking about, given your personal appetite for risk and the relative scariness of the indicators that have driven these eye-catching words in newspapers and on websites that drag in people like me.
The headline that added fuel to the stock market fire, which has burnt a lot of our stocks since early October was this from CNBC last week: “Goldman Sachs believes the US economy will slow to a crawl next year.”
With the US growing over 4% now, Goldman tips the four quarters next year will be 2.5%, 2.2%, 1.8% and in the final three-months, 1.6%.
However, there was an important conclusion that deserved a headline and it was: “But Goldman believes the US will skirt a recession next year.”
That’s good for people like me, who have been arguing that we’re going through a correction and not a crash. “We expect tighter financial conditions and a fading fiscal stimulus to be the key drivers of the deceleration,” wrote the bank’s chief economist, Jan Hatzius.
Only two months ago, fortune.com revealed the following: “Wall Street may Worry About a Recession. Not Goldman Sachs.” That’s when the investment bank was saying that their statistical telescope couldn’t see a significant economic collapse over the next three years!
And only two days ago, Stock.News.com was telling us that “Goldman Does Not Fear A Recession In The Near Future.”
More specifically, Goldman Sachs concluded that “…the economy is still in an overall upward trend, and despite a slowdown it will remain positive.”
These more positive views slightly contrast with this from CNBC over the weekend: “Dow falls more than 150 points, posts worst Thanksgiving week decline since 2011.”
Some of the big take outs from watching the data and the markets over the week were captured nicely in the following quotes:
- “I don’t think the bull run is over but I think we’re close to the end of the cycle,” said Mark Esposito, CEO of Esposito Securities. “It feels a bit unsafe.” Esposito cited slowing earnings growth, higher market volatility and slowing economic growth as signs the currency cycle may be ending. (CNBC)
- “Tech stocks are under pressure once again but more troubling is that oil prices are collapsing,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “Lower oil prices are not a good sight for the economy. OPEC has indicated they’re going to cut [production], but that’s not helping. That’s a bad sign.”
Okay, it’s not easy to be relaxed about this stuff, the negative US economic forecasts and the current correction but I was keen to see how the US consumer was doing because about 70% of GDP in the USA is linked to the consumer.
Here’s CNN’s take on the sales on the first day after Thanksgiving, when US retailers get out of the red and surge into the black: “Black Friday sales could hit a record $23b.”
The report also revealed that Mastercard sales were up 9% “and Adobe, which tracks digital sales, reported that online purchases on Friday were up nearly 23.6% compared to last year, with shoppers spending $6.22 billion.” A strong US consumer driven by jobs and wages growth can’t be ignored.
That’s all well and good but as CNBC reported: “For the week, the major indexes all dropped more than 3 percent. They also had their biggest loss for a Thanksgiving week since 2011!” Clearly, investors are not so confident and it’s other economic issues that are affecting them.
“A lot of the move [down for stocks] has to do with tariffs and moves by the Fed,” said Greg Powell, CEO of Fi-Plan Partners. “Depending on what happens in those talks, that could change the whole dynamic in the market from a sentiment standpoint.”
I think this view is spot on and if a trade deal is cracked, stocks would surge but if it’s not, then we could see this persistent pessimism prolonged until a positive circuit-breaker arrives on the scene.
One headline that hasn’t been used but should have been was the hedge fund manager I interviewed this week, who said he had 40% cash seven weeks ago but now has 5%! Clearly, he isn’t in the camp that this correction is a prelude to a crash.
I also liked it that at the recent Hearts & Minds Conference in Melbourne, which attracted some of the country’s top fund managers, that the subject of recession and a stock market crash wasn’t a prevalent issue for discussion.
But against this good story for stocks, others have a different view. This CNBC headlines proves it: “Bank of America sees market decline next year: ‘There is now an alternative to stocks’.”
Bank of America Merrill Lynch’s, Savita Subramanian, says the S&P 500 will rise to 3000 by the end of this year and then will decline to 2900 next year.
Interestingly, that would be a 13% rise from current levels! So that’s positivity within negativity, where I come from.
“Our rates team is calling for an inverted yield curve during the year, home builders peaked about one year ago and typically lead equities by about two years and our credit team is forecasting rising spreads in 2019,” Subramanian says. “Assuming the market peaks somewhere at or above 3000, our forecast is for modest downside in 2019.
“We believe the peak in equities is likely before the end of 2019.”
CNBC threw in a nice explanation of a downward sloping to the right yield curve and here it is:
“An inverted yield curve refers to when the yield on short-term sovereign debt, such as the two-year Treasury note, is higher than the rate on longer-dated paper such as the benchmark 10-year Treasury note. An inverted yield curve is typically followed by an economic recession.”
Clearly, longer term, Goldman and Bank of America are at odds on stocks but both see a slowing US economy. However, if a trade deal happens and the Fed doesn’t raise interest rates too quickly, their economic forecasts could prove to be too pessimistic.
A great article came via Bloomberg with the heading: “Grim Stock Signals Piling up as Wall Street Mulls Recession Odds.”
And while the rise of recession stories on Wall Street was noted, the Bloomberg team’s analysis of charts saw them conclude that most of the charts that they found relevant “reflect observations by analysts who don’t see a recession as the most obvious conclusion. Many view the sell-off as healthy after a 10-year run of gains.”
The team also pointed out that the “odds the U.S. will fall into a recession in the next year stands at 15 percent, according to Bloomberg’s U.S. Recession Probability Forecast index. While they see the economy losing a bit of speed next year and in 2020, the median estimate of economists calls for 2.6 percent economic growth in the next 12 months.”
Another Bloomberg yarn underlines the role of the Fed in the market anxiety right now with “Goldman Shows How a Big Hawkish Rate Shock Would Affect Markets” and so anyone who will stay long stocks must know what Fed boss Jerome Powell does with rates could have a big bearing on Wall Street and then our market. On that subject, I don’t think Powell is a dope, so him screwing up on rates is a lower order risk.
In the “I’m a little worried” department, I didn’t like this from the New York Times, which reported: “The prospects for a trade truce between the United States and China do not look good..”. That said, the newspaper is not a great Trump fan, so it could be wishful thinking!
And on the local front, where house price crash talk raises questions over our banks’ balance sheets and their share prices, I liked this from PIMCO — the world’s biggest bond fund manager. “An international comparison also suggests that Australia lacks the preconditions for a housing market crash. Key drivers of the U.S. housing crisis a decade ago – such as rapid accumulation of significant oversupply, compromised (sometimes fraudulent) underwriting practices and elevated leverage related to home equity and second lien loans – are absent. Australian mortgages are also full recourse with a strong social stigma attached to defaults. So far, the housing price correction appears purposely induced by proactive macro-prudential policies, which suggests that regulators maintain decent control over the severity of the decline and have room to soften their stance if necessary. Finally, the domestic labor market remains healthy, which ultimately supports household debt repayment capabilities.”
Adding up all the headlines above, I feel comfortable not seeing this market correction as a crash and believing that a stocks’ comeback is a distinct possibility with the economic outlook for both the USA and Australia looking more positive than negative.
All we need is Donald and Xi to do a bro-love-in in Argentina over the weekend on trade. I really don’t want to use the headline: “Don’t cry for me Argentina” next Monday in this Report!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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