Congratulations Are In Order
Kudos to anyone who bought (or told you to buy) the October 15th lows around 1820 on the S&P 500 and 1040 on the Russell 2000; “off the lows” though today’s closing prices, those indices are up +9% and +10.5%, respectively.
Double-kudos to anyone who sold (or told you to sell) the BABA-bubble highs around 2019 on the SPX and/or who told you to be out of domestic small cap equity style factor all year; from the S&P 500’s all-time high through today’s closing price, the market is down -1.7% and the Russell 2000 remains down for the YTD at -1.2%.
Triple-kudos to anyone who nailed both of those moves – if for no other reason than they fact that they possess superior talent at playing the “game of chess” that is institutional investing.
Enough With the Celebrating... Where To From Here?
Going forward, the directional outlook for U.S. equity market appears increasingly tough:
- Weak hands have likely been both shaken out of and enticed back into the market from a gross and net exposure perspective.
- Meanwhile, domestic high-frequency growth data is readily deteriorating, at the margins.
- On top of all this, falling inflation expectations are begetting rising expectations of an increasingly accommodative Fed.
In the context of these three factors, our bearish bias on the U.S. equity market hasn’t changed. If anything, Consensus Macro remains oddly convinced of a pollyannaish economic outlook:
Unfortunately, the data is becoming increasingly unsupportive of that narrative. Specifically regarding point #2, the two drivers of any U.S. economic expansion (i.e. household consumption and CapEx) appear to have lost considerable amount of steam of late.
Let’s ignore the horrible SEP Retail Sales print (falling gas prices, anyone?) and focus specifically on today’s SEP Durable Goods and OCT Conference Board Consumer Confidence numbers.
Brutal Durable Goods and CapEx Demand
Core Capital Goods dropped the most in 8M (-1.7% MoM) and Durables ex-Defense & Aircraft – i.e. the stuff the average household purchases – was down for a second consecutive month at -0.3% MoM; this was the 1st such instance of back-to-back contraction since the weather-induced weakness we saw in the first quarter.
MAJOR Consumer Confidence Head-Fake
At face value, the OCT Consumer Confidence print was a huge win for anyone who doesn’t really do macro. Specifically, the headline figure inflated to 94.5, which was the highest reading since a 95.2 reading back in OCT ’07.
Recall that this index peaked back in JUL ’07 at 111.9 – or right at the 61.8% Fibonacci retracement level relative to the JAN ’00 peak and MAR ’03 tough. Assuming this trend of lower-highs in consumer confidence continues alongside the structural marginalization of the median-to-low-end consumer, we’re just shy of that key 61.8% retracement level relative to that same peak and the FEB ’09 trough.
Buying stocks at/near the cycle peak in consumer confidence – or at/near cycle peaks in other late-cycle economic indicators (e.g. labor market, corporate earnings and investor sentiment) – has proven to be a VERY unprofitable exercise for the consensus “buy-the-dip” community (think: U.S. equity returns during 2000-02 and 2007-09).
Underneath the hood, results of the Conference Board’s “Plans to Buy Within 6M” sub-survey portends further weakness in household purchases of durable goods:
- Automobile Purchase “Yes”: slowed to 10.8 in OCT versus 12.1 in SEP
- Home Purchase “Yes”: flat at 5.1 in OCT
- Major Appliances Purchase Total Plans: slowed to 49.1 in OCT versus 51.5 in SEP
Headwinds Developing at the Micro Level as Well
For those bottom-up investors that prefer to “speak with management” in formulating their top-down views, let’s look at the Q3 earnings season-to-date, which is showing a VERY key component of both the market and the economy sucking wind of late – i.e. Consumer Discretionary.
Specifically, 998 of the 2,989 stocks comprising the Russell 3000 Index (~98% of investable U.S. equity market cap) have reported thus far, showing aggregate sales growth of +6.0% and aggregate earnings growth of +13.8%. Heading up the rear in both categories is the Consumer Discretionary sector, where 126 of the 448 index constituents have reported thus far for aggregate sales and earnings growth of +3.2% and -2.2%, respectively.
Janet's Out to Lunch
Regarding point #3, one would assume the Fed can’t go from lacing investors with QE3 drugs straight to plugging them QE4 baggies in such a short order – especially not with the “data-dependent” Janet Yellen at the helm. And since most economic data points come out on a monthly basis, it could be at least ~3M before the Fed has enough political cover to do anything – even though we’ve all agreed to agree whatever policy prescription they eventually decide upon will have little-to-no impact as it relates to stimulating economic growth.
On that note, our proprietary models are indeed supportive of rising expectations for easier monetary policy in the U.S., but only marginally. Stock prices, consensus expectations for growth, reported economic data and the labor market all need to decline/slow further and/or deteriorate for the Fed to be able to use “the data” to support introducing an incremental Policy To Inflate.
To top it all off, the current stock market trajectory overlays almost perfectly with its late-2007 analog – which is the last time consensus was as wrong on the outlook for domestic economic growth as they are today:
All told, such analyses are indeed frightening in the context of near-universal bullishness on U.S. equities...
Trick or treat!
Associate: Macro Team