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Economic Outlook is Entering Winter Environment
10/09/2019 8:30 am EST
Multiple indicators are showing major stresses on equity markets as we enter Q4 2019, writes Landon Whaley.
As we turn the page on another quarter and begin to traverse the final three months of 2019, it’s a good time to contextualize financial market price action. Just 385 days ago, we made the “Winter in Q4 2018” call. Four days later, the S&P 500 peaked at a new all-time high and then proceeded to break 19.3% over the ensuing three months. Rather than evaluating market returns from a year-to-date perspective, let’s see what markets are telling us in year-over-year terms as of Friday’s close:
- S&P 500: +1.6% return with a -19.3% maximum drawdown = R-2-R of 0.08
- World equities (ex-U.S.): -2.3% loss with a peak-to-trough decline of 17.1% = R-2-R of all downside.
- U.S. Bonds: +10.9% with just a -2.0% of downside risk = R-2-R of 5.0.
- International developed market bonds: +7.5% return with a -2.7% maximum drawdown = R-2-R of 2.7.
- Gold: +24.6% with a peak-to-trough decline of -5.3% = R-2-R of 4.7-to-1.
- Commodities: -17.9% with a crash-worthy -21.4% of downside risk = R-2-R of all downside.
For those stock market junkies out there, here’s a rundown of equity sector return stats (return/drawdown/R-2-R) for the trailing 12-months: tech (+6.2%/-23.8%/0.26), consumer discretionary (+3.8%/-21.3%/0.18), financials (-0.5%/-20.4%/ all downside), basic materials (-2.6%/-19.0%/ all downside), small caps (-9.0%/-25.1%/all downside), retailers (-14.8%/-25.5%/all downside), utilities (+24.0%/-8.7%/2.8), and REITS (+20.8%/12.8%/1.6).
It’s worth noting, our U.S. Shift Work and Retail-iation macro themes have perfectly positioned you over the last 12-months, on both the bullish and bearish side of U.S. markets.
The year-over-year picture is crystal clear; financial markets are confirming the Fall and Winter Fundamental Gravity environments engulfing the globe over the last 12-months. Much to the chagrin of the Old Institution and the media, the previous year in financial markets hasn’t been catalyzed by trade wars, Brexit, impeachment rumblings, or anything of the like. As is usually the case (over periods longer than a few weeks), financial market price action has been entirely driven by the prevailing Fundamental Gravities in the U.S. and abroad.
However, for those obsessed over the year-to-date picture, allow me to contextualize the totality of global data, year-to-date:
- Global demand is slowing, at an accelerating rate
- Domestic demand is slowing, at an accelerating rate
- Global trade volumes are taking the elevator shaft on the way down
- Global and domestic Manufacturing PMI’s are in contraction
- U.S. corporate earnings growth rates are now 12-months past a cyclical peak
- Earnings growth contracted in five of the 11 S&P 500 sectors during Q2 2019. The earnings for those sectors, as well as the six sectors clinging to anemic but positive growth, will only deteriorate with Q3 earnings announcements over the next few months.
- Greenback strength is tightening financial conditions globally and squeezing corporate profit margins domestically.
- Current geopolitical uncertainty (U.S.-China, Japan-South Korea, Middle East, Hong Kong) only exacerbates the Global Winter Fundamental Gravity.
From mid-2016 to late 2017, I was bulled up on U.S. and global risk assets, but then the data changed. Economic data, both globally and domestically, continues to fall from the ugly tree and hit every branch on the way down.
I cannot look at the immense sea of data showing all this weakness and pretend we are still in a growing bull market.
Given the plethora of narratives running contrary to the Fundamental Gravity showing contraction, you can bet that the same investors caught wrong-footed last week will continue to get their bell rung moving forward. There is going to be a boatload of risk (and opportunities) as we close 2019, so get your popcorn ready!
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