With the S&P 500 finally returning to new record highs today, fully recovering the price correction this year, let’s take a look back at the correction, and where stocks can go from here.
As I said in my January 30 note “experience tells us that markets don’t go in a straight line. And with that, we should expect to have dips along the way for this bull market. Since 1946, the S&P 500 has had a 10% decline about once a year on average. A correction here would be healthy and would set the table for hotter earnings and hotter economic growth (coming down the pike) to ultimately drive the remainder of stock returns for the year.”
Fast forward eight months, and we’ve now had a 12% correction. And we’ve since had back-to-back quarters of 20%+ earnings growth, with an economy that is finally growing at better than 3% four-quarter average annualized growth.
Meanwhile, stocks remain cheap. The 10-year yield is still under 3%. And historically, when rates are low (sub 3% is still VERY low), stocks tend to trade north of 20 times earnings. The forward P/E on stocks at the moment is just 17. If we apply a 20x multiple to $170 in forward S&O 500 earnings, we get 3,400 in the S&P. That’s 19% higher.
With that in mind, let’s also revisit my chart on the long term growth rate of the S&P 500.
In the orange line, you can see what the S&P 500 looks like growing at 8% annualized (the long-run average growth rate) from the pre-crisis peak in 2007. This is where stocks should have gone, absent the near global economic apocalypse. And you can see the actual path for stocks in the blue line.
Bottom line: Despite the nice run we’ve had in stocks, off the bottom in 2009, we still have a big gap to make up (the difference between the blue line and the orange line). This is the lost decade for stocks.
This argues for another 28% higher in stocks to fill that gap.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
On Tuesday, we looked at the similarities between the recent currency collapse in Turkey, and the 2014 collapse of the Russian ruble.
And we looked at this chart of how the S&P 500 behaved back in 2014.
The S&P 500 is the proxy on global market stability. And stocks were shaken on Russia back in 2014. When the ruble collapsed, U.S. stocks lost 5% of its value in just 7 days.
But the decline was fully recovered in just 3 days.
Given the similarities of these two currency crises (a currency attack on a bad behaving leader), I thought we might see the same behavior in stocks this time. And that’s what we appear to be getting – a shallower decline but a swift recovery.
So, why the quick recovery?
As we also discussed on Tuesday, while the Turkish lira has been the center of attention in the financial media, the real reason global markets were shaking had more to do with China.
If a currency crisis that started in Turkey ended in China, there would be big geopolitical fallout.
As we’ve discussed over the past month, the biggest risk from China is a big one-off devaluation. That would stir up a response from other big trading partners (i.e. Europe and Japan), where they would likely coordinate to blocktrade from China all together. That’s where things would get very ugly and likely (ultimately) culminate in a military war.
But the probability of that outcome was reduced yesterday. We had news that a China delegation would travel to the U.S. to re-open trade negotiations. They’re coming back to the table.
So we should expect concessions from China. That’s good news for the globlal economy and for global stability. And that news drove the big bounce in stocks yesterday, which continued today. I suspect this will be the catalyst to get stocks back on the path toward a double-digit gains by year-end.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
We talked yesterday about the sharp currency devaluation in Turkey over the past few days. The Lira bounced aggressively today, which soothes some fears in global markets.
As I said, many have made comparisons to the Asian currency crisis of the late 90s, and have speculated on the potential for the events in Turkey to ultimately destabilize global markets. But as we discussed yesterday, this looks more like the 2014 currency attack on the Russian ruble — a geopolitically-driven crippling of an economy with bad behaving leadership.
With that in mind, here’s what happened to U.S. stocks back in 2014, when the ruble lost 5% of its value (vs the dollar) in just 7 days. But the decline was fully recovered in just 3 days.
U.S. stocks have been the proxy for global market stability throughout the past decade (the crisis and post-crisis era). So, for perspective on just how shaky the Turkey influence is being perceived, the S&P 500 sits just one percent off of all-time highs at today’s close.
Remember, the ECB stands ready to plug any holes necessary in European bank exposure to Turkish debt. That euro-denominated debt has been the risk people immediately homed in on.
The real question is, will this (currency crisis) ultimately end in China, with a revaluation of the yuan, or perhaps a free-floating yuan?
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
The Nasdaq continued to slide today. Stock indices tend to go down a lot faster than they go up. The tech giant-driven Nasdaq was up over 15% year-to-date, just a few days ago, and has now given up more than 4% from the highs.
Not surprisingly, as people run for the exit doors on the big tech giants (taking profits), we’re seeing money rotate into the blue-chip value stocks.
The Dow and S&P 500 did much better than the Nasdaq today, which continues to slowly correct the big performance gap of the year (where the Nasdaq was up 15% at one point, while the DJIA was flat on the year).
Now, the biggest event of the week for markets may take place tonight. We hear from the Bank of Japan on monetary policy. We’ve discussed, many times, the role that Japan continues to play in our interest rate market.
Despite seven hikes by the Fed from the zero-interest-rate-era, our 10-year yield has barely budged. That’s, in large part, thanks to the Bank of Japan. Japan’s policy on pegging its 10-year yield at ZERO has been the anchor on global interest rates.
As I’ve said, when they finally signal a change to that policy, that’s when (our) rates will finally move. And that may be tonight. There is speculation that they may adjust UP that target on their 10-year yield. That would represent a dialing back of the BOJ’s QE program, which would signal the initial steps of exiting the crisis-era QE program.
What would that do? If the BOJ does indeed adjust their “yield curve control” policy, it should send global interest rates higher. That would put our ten-year yields back above 3%, which has been a level that has caused some uneasiness in markets. This time around, a move back above three percent would reflect a steepening U.S. yield curve which may be perceived as a positive, especially for those that have been concerned about the potential of seeing an inverted yield curve (i.e. a recession indicator).
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
As we end the week, let’s take a look at a few charts ….
We had the first look at Q2 GDP today. Here’s an updated look at the chart of the average four-quarter annualized growth rate we looked at
yesterday ….
This number will be formally revised two more times, but the “advance” number came in at 4.1%. Yesterday we talked about the prospects for the highest four-quarter annualized growth rate since 2006. We just missed it, in this first reading. But the Q1 number was revised UP to 2.2%, so adding in today’s Q2 number, and we get 3.1% four-quarter average annualized growth. Only for a moment, in 2010, was it better (at 3.15%).
I suspect we will see a bigger number in the coming Q2 revisions. And if sentiment on trade indeed bottomed out on Wednesday, with the EU concessions, we will likely have a big Q3 growth number coming.
That steadily rising trend, since the election, in the four-quarter average growth rate is a big deal. With that, I would call the above chart, the most important chart of the week…
Let’s look at the second most important chart of the week ….
I’ve been making the case that the massive Nasdaq outperformance, relative to the Dow, would begin correcting. In the chart above, you can see that it’s starting (Dow moving up, Nasdaq moving down). And it’s being led by strength in the blue chips following strong Q2 earnings, and weakness in two of the big tech giants (Netflix and Facebook) following big misses. With that, Facebook has quickly revisited levels of early May (which should give us all perspective on how aggressive this run in the tech giants has been over the past two months).
The question: Is it “peak Zuck?”
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
Last week Larry Kudlow, the White House Chief Economic Advisor, hinted that Jean-Claude Juncker (head of European Commission) would be coming to Washington with some concessions on trade.
As I write, we’ve yet to hear the results of the Trump/Juncker meeting today, but this could be a major turning point in the perception of the U.S. trade offensive. Movement equals success. And in that case, concessions out of Europe may pave the way to more concessions globally. That signal could trigger a big rally in global markets.
One particular market to watch is copper. Copper is the first place you should look if you think the world is escaping the slugglish post-crisis growth period, and possibly entering an economic boom period. It has been sensitive to the global trade disputes. A clearing of that, would resume what should be a multi-year bull market in copper.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
As we’ve discussed, tech and small-caps (the Nasdaq and the Russell 2000) have been big outperformers on the year, compared to blue-chip stocks. But today seemed like an exhaustive move in that divergence.
There was a clear rotation out of the small-caps (which finished down on the day) and into the blue chips (the Dow finished up nicely on the day). And the red-hot Nasdaq reversed from new record highs to finish flat.
Trump tweeted this morning that tariffs are bringing trade parters to the negotiating table. He seems to be confident that his meeting with EU Chief Jean-Claude Juncker tomorrow will result in concessions from Europe. And there seems to be movement on a new NAFTA deal too. Add this to more good earnings hitting from second quarter earnings season, and it’s enough to get big investment managers moving back into the blue-chip multinationals.
Remember, we’ve been watching this chart. The Dow still has a long way to go, to recover the record highs of earlier this year. But the technical breakout of this corrective downtrend has broken.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
We have a big earnings week. The tech giants report, along with about a third of the S&P 500. And we get our first look at Q2 GDP.
As we’ve stepped through the year, we’ve had a price correction in stocks, following nearly a decade of central bank policies that propped up stocks. This correction made sense, considering central banks were finally able to make the hand-off to a U.S. led administration that had the will and appetite (and alignment in Congress) to relax fiscal constraints and force the structural reform necessary to promote an economic boom.
From there, for stocks, it became a “prove-it to me” market. Let’s see evidence of this “hand-off” is working — evidence the fiscal stimulus is working. That came in the form of first quarter earnings. This showed us clear benefits of the corporate tax cut. The earnings were hot, and stocks began a recovery.
The next steps, as fiscal stimulus works through the economy, we’ve needed to see that the uptick in sentiment (from the pro-growth policies) is translating into better demand and economic activity. So, with Q2 earnings we should start seeing better revenue growth, companies investing and hiring. And we should see positive surprises beginning to show up in the economic data.
We’re getting it. Almost nine out of ten companies reporting thus far have beat (lofty) earnings expectations. And about eight out of ten have beat on revenues. This week will be important, to solidify that picture. And though many of the economists all along the way of the past year didn’t see big economic growth coming, it has been steadily building since Trump was elected, and the Q2 number should push us to over 3% annual growth (averaging that past four quarters).
Now, let’s talk about the big mover of the day: interest rates. The 10-year yield traded to 2.96% today, closing in on 3% again.
We’ve discussed, many times, the role that Japan continues to play in our interest rate market. Despite 7 hikes by the Fed from the zero-interest-rate-era, our 10 year yield has barely budged. That’s, in large part, thanks to the Bank of Japan.
As I’ve said in the past, “Japan’s policy on pegging its 10-year yield at zero has been the anchor on global interest rates. Forcing their benchmark government bond yield back to zero, in a world where there has been upward pressure on interest rates, has meant that they can, and will, buy unlimited amounts of JGBs to get the job done. That equates to unlimited QE. When they finally signal a change to that policy, that’s when rates will finally move.”
With that in mind, there were reports over the weekend that the Bank of Japan may indeed signal a change in that “yield curve control” policy at their meeting next week. And global rates have been moving!
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
The jobs report this morning continued to show an improving economy, operating with the luxury of low inflation.
I say improving because as the unemployment rate ticked higher, it represents people coming back into the work force. Those people that have been discouraged along the way, through the economic crisis and recovery, and have dropped out of the work force, are coming back, looking for work.
Remember, the missing piece of the recovery puzzle over the past decade has been wage growth. That has been the telltale sign of the job market, despite the low headline number. With little leverage in the job market to maximize potential, much less command higher wages, consumers tend not to chase prices in goods and services higher–and they tend not to take much risk. This tells you something about robustness of the economy. And that’s precisely why we’ve needed fiscal stimulus and structural reform. And it’s just in the early stages of feeding through the economy.
The other big news of the day was trade. The U.S. started implementing duties on $34 billion of Chinese imports today. On that note, the media has been focused on one specific sentence in the Fed’s minutes yesterday. After weeding through the long conversation on how well the economy was doing, they picked out this sentence to build stories around “contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.” Plucking this one out and using it to support their scenarios of trade wars and economic implosion has to be good for reeling in readers.
But keep in mind capital goods orders (the chart below) are nearing record highs again.
Add to this: An ISM survey back in December showed that businesses were forecasting just 2.7% growth in capitalspending for 2018. But when they were asked again in May, they had revised that number UP to 10.1% growth.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
I hope everyone had a great Fourth of July yesterday. Today, the markets continue to be thinly traded as we head into the jobs report tomorrow.
We did get minutes from the recent Fed meeting today. This is a closer look into the views of the Fed from their June meeting. Of course, we already had a lot of information from that June meeting: the Fed hiked rates for the second time this year, they telegraphed an additional hike for the year in their projections, plus the June meeting was also accompanied by a press conference from Fed chair Jay Powell. And his explicit “main takeaway” was … “the economy is doing very well.”
With this in mind, as we head into tomorrow’s jobs numbers, the 10-year yield is probably the most important chart to watch. While inflation isn’t near reflecting an economy that’s running hot, the interest rate market is even more disconnected.
Remember, back on May 18, in my ProPerspectives note, we discussed this chart …
As the world was becoming concerned with the speed and level of market interest rates, we had this big technical reversal signal hit for the key 10-year government bond yield.
We focused on this in my May 18th piece, where I said “this technical phenomenon, when closing near the lows, is a very good predictor of tops and bottoms in markets, especially with long sustained trends.” And I said, “I suspect we may have seen some global central bank buyers of our Treasuries today (which puts downward pressure on yields) to take a bite out of the momentum.”
Today the chart looks like this …
So, that outside day did indeed predict a reversal. And we head into tomorrow’s job report with the benchmark 10-year yield at just 2.84%. That’s in a world where the economy is running at 3% growth and unemployment is under 4%.
But this disconnect may be changing tomorrow. The key data point tomorrow will be wages (Average Earning), not jobs. A hot number there will likely turn this around, and bring higher rates back into the picture.
If you haven’t joined the Billionaire’s Portfolio, where you can look over my shoulder and follow my hand selected 20-stock portfolio of the best billionaire owned and influenced stocks, you can join me here.
