“It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”
-Thucydides
Phew. That was close! After this recent -1.1% “correction” from the SP500’s all-time closing high of 2594 last week, you’d think the world was about to come to an end…
While the end of the world may not be something you’re positioning for in your portfolio (we’re all dead in that scenario), consensus continues to hedge (selling during corrections) on the expectation that a bear market in US stocks is inevitable.
When you position for “the inevitable”, there’s a timing component that really matters to your P&L.
The aforementioned quote comes from one of the great modern American strategists on decision-making (Graham Allison) in his latest book that we highlighted at this year’s Macrocosm, Destined For War – Can America and China Escape Thucydide’s Trap?
That’s a much bigger question to answer than whether or not the SP500 goes to 2600 or bust!
Back to the Global Macro Grind…
It really is quite frightening that some of our clients seem so frightened.
After all, we’re one of the few daily strategy notes that you could have been applying to your market-timing and decision-making #process for the last year that’s been buying every damn dip in US growth stocks.
Instead of being scared, you should be smiling this morning.
:)
If there are more subscription revenues associated with scaring the hell out of you every day, I can do that. Maybe I’ll bang something out every Thursday night after a bottle of wine and call it the Late, Dark Look?
Bear markets and late-cycle economic slow-downs are inevitable. Since I’ve never missed calling one of those in the US, I get that. But confusing the word inevitable with imminent can cost you either your job or a lot of money.
On measuring and mapping the American Economic front, here’s the latest data-driven update:
- US Retail Sales for OCT came in at a very healthy +4.6% year-over-year growth rate = Bullish TREND
- US Consumer Price Inflation (CPI) for OCT ticked down small (from 2.20% to 2.04%) = Bullish TREND
- US Producer Price Inflation (PPI) for OCT ramped to its highest rate since 2012 at +2.8% y/y = Bullish TREND
It’s still early in Q417 data-receipt terms, but that puts our predictive tracking algorithm for Q417 US GDP at:
A) #Accelerating for the 6th straight quarter to +2.48% year-over-year real GDP growth … and
B) Implying +2.64% on a q/q SAAR basis (i.e. the way Wall Street reads the headline)
Since the Bloomberg Consensus forecast for US GDP is currently +2.7% (there’s no real-time now-casting of that forecast, that’s why the number only goes to one decimal point), for the first time all year consensus has caught up to our Bullish US GDP view.
As anyone who has been in this game for more than one cycle knows, consensus can remain right for long periods of time. That said, being consensus isn’t as intellectually pleasing to everyone who is supposed to be smarter than everyone else.
While our contrarian view from a year ago on the US Growth and Profit Cycle is now consensus, our views on both China and the South of Europe #Slowing into and throughout the 1st half of 2018 are not.
Here are some recent economic data reports from the European front:
- Eurozone Consume Price Inflation (CPI) slowed to +1.4% year-over-year in OCT vs. +1.5% in SEP
- Eurozone “core” CPI slowed to +0.9% year-over-year in OCT vs. +1.1% in SEP
- France’s Consumer Price Inflation (CPI) ticked up to +1.1% year-over-year in OCT vs. +1.0% in SEP
- Germany’s CPI slowed to +1.6% year-over-year in OCT vs. +1.8% in SEP
- Spain’s CPI slowed to +1.6% year-over-year in OCT vs. +1.8% in SEP
For those of your friends who think “it’s different this time” in Europe because they bought a good looking chart of European stocks in May-July of 2017, you can remind them that on both European consumption and inflation factors it is not.
Since European countries have starkly different forward outlooks for population growth rates in their 35-54 year old (biggest spenders) population cohorts than the USA does, they have a lower capacity to consume.
When you don’t have any wage inflation and “core inflation” looks as dead as a doornail, you have what we call Slower For Longer. And you don’t have to take my word for it on that – look at the TREND in European bond yields. They agree.
Ultimately, if you’re trying to position for the “inevitable bear market”, why aren’t you already making that bet in Southern European Equity markets?
Heck, you can be long The North (Germany) on the other side of short Spain, Portugal, Italy, France, and Greece (Greek stocks are making fresh new lows this morning, down -6.7% in the last month alone) and perform just as well.
While I agree that A) winter is coming and B) bear markets are inevitable. The alpha is captured in timing them right.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.30-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
DAX 129 (bullish)
VIX 8.46-13.57 (bearish)
USD 93.50-95.22 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 54.23-57.99 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
