Divergence seems to be the name of the game right now in stocks and bonds both. There is also a lot of divergence going on in people's thinking as well when it comes to concerns about markets and the data which typically heavily influences stock prices. The valuations which underlie the fundamental view of stock prices, in terms of a macro view of the overall direction of the markets. 1) Stocks are diverging from traditional price supports. 2) The average investor is divergent in their historical approach to accepting risk (think about #2 and it is fully related to #1). 3) The macro (global) view of investing is diverging from it's typical bent so this is creating some large imbalances. 4) Governments around the world are much more involved in trying to balance economies/stock markets than they have ever attempted to before and they have little to no real experience at doing this or doing it well.
As of late.
With the month of November putting in a strong and smooth showing, (see below), it might have the tendency to rock some investors to sleep but it appears some alert investors are not interested in taking a nap right now at all. For them, it seems they, more than likely, will benefit from what those concerns are based on and what we see occurring across a broad spectrum of market influencing portions of data.
But before we dig into some interesting details, let's enjoy the most recent month and what it did for markets. As you can see below, the S&P had a relatively smooth and steady performance last month. Real volatility was almost non existent during the month so the S&P 500 index gave investors a smooth ride up of more than 2.5%+.
The S&P 500 index for the Full Month of November 2019.
Additionally if we look back over 2019, the recency bias of the market (flat to up some the last 6 or so months) lulls people to think all is well with markets. In the early part of 2019, markets rose nicely but it is important to remember markets were simply trying to rebound from the huge downturn which occurred just 12 months ago (see below) in the 4th quarter of 2018 when markets dropped almost -20% top to bottom and finished the 4th quarter down -14.7%! So though the S&P 500 has risen nicely the last 10+ months, if we go back and look to simply include the 4th quarter of 2018, the "growth" numbers of the S&P 500 shrink dramatically and quickly - we do have to look at multiple time frames (here showing the last 15 months and the last 2 years both, and not simply cherry pick like the media pundits often are accused of doing.
Now if we had just looked at November with it's smooth move upwards plus even if we factored in October's nice gain, as I mentioned earlier, some might have a tendency to be rocked to sleep. If there is any way I can, let me encourage you, don't do it, don't take a nap as it relates to the markets just yet. There are a whole host of reasons why and we will review some of those diverging ideas now.
First, consumers seem to be confident, too much so in our view and particularly so by comparison to some other critical factors. Look at this simple list below and see just a few easy numbers of where things are at the moment.
You may look at this small group of indicators and note that Consumer Confidence is down (instead of up), -0.6 pts in this most recent read and say what's the comment about "too confident" or where's the problem? Look now at the bottom of this list and see what the CEO Confidence number has done. Yes. Consumers only dropped -0.6 out of a current score of more than 125, a very small move indeed but the CEO Confidence not only dropped -9.0 but this on a scale of 34! A huge move indeed.
Who likely has a more detailed perspective on where the economy is, the ones getting up and doing the work each day OR someone who's job it is all day every day to keep a whole host of people working? So CEO confidence is dropping like a rock and the consumer is almost yawning in their decline of confidence! This is a major point of divergence, consumer and CEO confidence, the key term we discussed in our opening on "Market Snapshot".
Now we move on to more specific and less subjective data. Below is a longer term, multi year graph of U.S. Durable Goods. These are things when you buy them, you don't go back next week or next month or next year and buy more since they are "durable". We overlay this graph with recession data so it is easy to note that reductions in Durable Goods orders, while they do not always produce a recession, do indeed come coupled with a recession in certain instances.
In the above graph, we note that Durable Goods orders have been dropping quite steadily for more than a year+ and have now dropped into negative territory. This longer term falling "trend" is not our friend. Not at all. If people are buying less "stuff" than they have been in any month or any quarter than in the last 24 months, why then are stocks continuing stutter and sputter higher? The higher stock prices go, the less there is to support them and keep prices strong. True divergence going on again.
Not to be outdone by the Durable Goods orders, the ISM (Institute for Supply Management) Manufacturing data has undergone an even more severe drop in its numbers than the Durable Goods data has. ISM numbers have dropped the last four months in a row. While many analysts become concerned when the numbers get below 50, we watch this each month and look for our standard, "rate of change" view on the data. As you can see here, the ISM index began to sputter back in late 2016.
As critical as manufacturing is to the U.S. economy and with the ISM index moving precipitously downward (as it often does) the last 20+ months, stocks have ignored this drop to their peril and to the peril of those who, buy, hold, sit and wait. This too has an overload of divergence to it - ISM falling, stocks staggering higher.
In these graphs it is straightforward to see that on the way down, the ISM numbers drop harshly and most of the time (not all...) the move back higher is choppy, stair stepped and filled with faltering efforts as it tries to regain ground (see the red numbers 1- 6 highlighting the staggered moves) trying to get higher almost every time. Now as we see where we are we need to be aware of how we got here and that line from then till now may help direct us to where we are going. If we look at November and it's relatively smooth upward move plus the positive October, as I mentioned before, some might have a tendency to be rocked to sleep. My encouragement would be, don't do it.
We brought up the word and the idea of inflation beginning to come into the picture now after being absent for such a long period of time. The Feds have tried to get inflation going for many years without any success. Well, now inflation is beginning to show up and The Fed might not like it. Economies slowing but inflation rising? Not a good set of bedfellows for sure -- talk about divergence? STAGFLATION is the name of this new game which rarely produces any kind of economic winner(s). Also, suffice it to say, the 67K jobs for November coupled with a negative revision to the October jobs numbers, followed for further softness in the Employment series for November. Additioinally, Fed Regional Surveys and the November ISM Manufacturing (mentioned above already) releases are not signaling upside for much of anything. This is the type of divergence which hinders most any actions of any economic interventionist (The Federal Reserve)!
We remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages- Just an FYI on Rates:
Mortgage rates have for the moment seemingly stabilized. This is true over the last 2-3 months. They are still very much on the low end of their range and our view is that there is more downward shift in rates to come. The economy in the U.S. is still about the best thing going as compared to the rest of the world but rising rates for mortgages would really begin to derail home construction numbers. Due to this, rates are short term likely to stay in this range with a greater possibility of moving lower rather than higher. STAGFLATION maybe already be on the delivery truck for the global economy and that could push rates for mortgages lower from this range.
What's a FOMO?
Back during the "paint ball" craze, my boys thought they were missing out since, at the drop of a hat, I did not go out, throw a couple of bills on the counter and buy them the latest and greatest paintball guns and gear. If they went and played somewhere, they would simply rent the paintball guns and play away! Dad was a real bummer of a guy since I wouldn't go for all the guns and gear per person and just let them have at it. What they did not realize was that I first wanted to make sure they wanted to stick with this for a while and then I hatched a plan to surprise them.
As we neared my birthday one summer, I went out and bought myself two paintball guns and enough gear for all three of us. They knew nothing about this until my actual birthday party. My wrapped "gifts" were there from everyone including myself. I purposefully opened my presents to me last.
Much to their surprise I now had two brand new paintball guns for me to use. I really did this so there would be two guns available for them but since they were mine, the two of them would not have free reign to take their gun when they wanted to. Also, I didn't want them to end up arguing over who got to use which gun and if one broke, they would not be accusing each other of breaking "their" gun. I also knew the follow on conversation with me about why it broke would be much more subdued as well as we could all work on the guns together and learn a little bit. Additionally, if you returned "my" gun to me without cleaning it well, next time you got to use the rental gun for sure! This was all done based on something I learned as a basketball coach, "The desire to gain is strong but..the desire to 'not lose' is even stronger". This notion is today referred to as FOMO. The "Fear of Missing Out". (Think of the mobs out on Black Friday.. FOMO.
The Fear of Missing Out is truly a huge and sometimes very illogical motivator for many people based on whatever it is they highly value. To get some keen insight(s) as to what your motivators may be as it applies to money, try reading LOADED. I read it a few years back and was surprised with a few of the peripheral things that motivate me as it pertains to money. It's an easy and worthwhile read.
Back to the current markets. It seems so many investors right now have a FOMO and yet also have a diverging fear of getting their hand caught in the cookie jar in terms of what they want versus what they are willing to take risks on in their investing.
Don't let the FOMO (or any fear) drive any parts of your decision making when it comes to investing.
Where are we in the profit cycle and or the market cycle?
U.S. Corporate profits peaked over a year ago, but we hear a lot of chatter about "all time highs". So, prices can't stay up forever...
Or the China negotiations?
I have spoken a few times lately and the most common question I get is about the China/U.S. trade negotiations/tariffs. This cartoon below sort of signifies my outlook. While China does sell us about 500% more goods and services than we sell them, that basically puts the ball in the U.S.'s court......... BUT China is not run by a populist impacted election nor a government elected at large so it is easier for China to wait the U.S. out and let the voting public pressure build on the U.S. government to occur from within the U.S. and not have to have that pressure really come from China itself.