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Sometimes, figuring out where the markets are headed is a difficult, complex task. Sometimes, it all boils down to a simple question. I think we’re firmly in the latter situation right now. That question?
Is this a real economic rebound … or not? The answer will determine where virtually every asset on the planet heads next, and which U.S. stocks will outperform versus underperform in the remainder of this year.
Just look at what happened in the first half of 2016. "Slow growth/pre-recession" assets soared in value. Gold took off like a rocket. Treasury bonds surged in price, causing interest rates to plunge. The Japanese yen exploded in value, while the U.S. dollar sank against a broad basket of currencies.
Within the stock market, "Safe Yield" names vastly outperformed riskier equities. Utilities, telecoms, consumer staples and related sectors put up huge gains, even as the broad market went sideways and "growthier" sectors underperformed.
But that all began to change in July and early August. Suddenly, the new narrative became: "The economy is off to the races again!"
The chorus of bulls said: Look at the fantastic jobs figures we got for June and July, rather than the dismal numbers from the previous five months. Look at future GDP growth, rather than the lousy GDP we’ve had for three straight quarters. Look at future corporate earnings, rather than the abysmal, five-quarter stretch of negative numbers we just experienced. They all confirm that happy days are here again.
Sure enough, the stock market sectors that were outperforming began to underperform. Treasury bond prices started drifting lower, and so did gold. The dollar rallied off its lows, and market-based indicators of volatility like the VIX tanked.
That brings me to today, and that key question I posed at the outset: Is this a great economic turn for the better? Or is this just a flash in the pan, a bounce that’s doomed to peter out?
I’ve made no secret of the fact I believe we’re very late in the credit and economic cycles. Many of the world’s smartest fund managers and billionaire investors agree with me.
There is also ample evidence that lower and lower rates, and more and more QE, are doing less and less for the real economy. Plus, the collateral damage is getting progressively worse for banks, pension funds, insurers, and savers.
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| I believe the U.S. dollar is likely to lose ground. |
As a result, I still believe that the greatest risk lies with economically sensitive stocks. I believe the U.S. dollar is likely to lose ground, and that bond yields could fall even further — regardless of what the June and July employment figures showed.
It’s worth pointing out that while Treasury yields spurted higher on the jobs news, they failed to breach significant technical resistance. The yield on the 30-year bond is continuing to chop around, up just 18 basis points or so from its all-time low from early July.
If I’m right, it would be bullish (again) for "Safe Yielders," gold, the Japanese yen, and other investments that dominated in the first half of 2016. It would also mean the market moves we saw in July and early August were just multi-week corrections … and that the longer-term trends I first identified and alerted you to more than a year ago are still in play.
A definitive answer shouldn’t be far off. The economic data we get in the next couple of weeks will tell the tale, as will the technical trading action in all of the assets and sectors I just identified. The lousy productivity news we just got a few days ago isn’t very encouraging though.
U.S. productivity — or how much output employees produce for each hour worked — tanked 0.5% in the second quarter. That was much worse than the 0.5% gain economists expected. It also dropped in the first quarter of 2016 and the fourth quarter of 2015. That three-quarter string of losses is the worst since 1979.
Why does that matter? Higher productivity allows the economy to grow faster and living standards to rise, while also keeping corporate profitability healthy. Lower productivity reduces living standards, puts pressure on corporate profits, and often leads to job cuts down the road.
Bottom line: We’ll know soon enough whether this rebound is a big trend change, or just noise. But I wouldn’t make any wholesale changes in your portfolio yet, based on the inconclusive and shorter-term evidence we’ve seen to date.
Until next time,
Mike Larson
P.S. I will be hosting an event this coming Tuesday August, 16: Cracking the “T” Code. This code could make a HUGE difference for you in today’s chaotic times so please, register today.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 25 comments }
Mike
Let me know if your seminar on the “T” can be watched at a later date on video.
Thanks
Peter
Mike,I just dont know,Im in cash,just sold all my gold yesterday,thursday,This is giving me the eebee jeebees,As you say,is the market going to the moon or is it falling,this fiat money is spooking me.It just amazes how the market is going up and up.
It is very much like 1929 all over again. Irrational exuberance, bets at the races with borrowed money, rather than off to the races. I’m in safe mode and waiting for the day of reckoning.
The ongoing “hype” about how significantly the economy has recovered is akin to a “house of cards” which has been perpetuated by the government, the Federal Reserve and the financial communities who have been living off of cheap money since the inception of QE.
The endless printing of money by the Federal Reserve is totally irresponsible and the lack of fiscal responsibility by the elected idiots in Washington DC absolutely incompressible. The government is “broke” my concern becomes what can a citizen do to protect their families from impending reconning?
Many of the commonly traded companies have used the “cheap” money to buy back massive amounts of their stock which ultimately “raises” their earnings per share and apparently their auditing firms are not required to report these smoke and mirrors kinds of activities to reflect the adjusted earnings in their quarterly reports. The “true” picture will begin to emerge with the next round of earnings reports.
The “Media” and related “Talking Heads” are unwilling to address issues such as these for fear to stepping on someone’s toes. These individuals seldom do any in-depth analysis and when the markets take a big hit they will create some kind of bs story which will cover their butts for the moment. Every time this happens they lose more creditability and become just “noise” in the media.
Seemingly anything but superficial coverage and analysis is the norm today which something they will have major difficulties re-establishing their creditability. While I am not happy with either Presidential candidate, I will say the one really positive thing that Trump has accomplished is “stir up” both the Washington political establishment and annoy the very opinionated media reporting which is a disservice to all Americans. Perhaps the New York Times and Washington Post are contributors to the Clinton Foundation?
If I still did serious research the interest yield on government and corporate debt instruments would be interesting. For example, those high yield 30 year government bonds are expiring. At some nexus point the low interest rates will become destructive to large financial interests. Quantitative easing can only mask savings depletion and available private monies for so long. Then financial reality not central bankers rule the day. The only mystery is when.
It is inconceivable that tha American worker is becoming less productive in view of the ever more advanced technology at his disposable. Since productivity is a radio of number of workers devided by GDP it seems to me that, assuming that the GDP are accurate (and they seem to be so), the estimated number of workers being added to the economy are too high. Time will tell.
Very timely and well written. It’s as if you wrote that article after the retail sales/PPI numbers (I know you didn’t)…… spot on so far.
I think that the Government is blowing up the positive numbers until after the election, with revisions to follow and it is pretty obvious why.
Well retail sales implies it’s not real. Of course, that means nothing to the algo driven stock market. But to imply that the market can only go up in the face of recessionary data (and crumbling real estate and credit) forever would imply that “it’s different this time”. You don’t have to be on a permanently high plateau to know that it rarely is…
Wouldn’t much of that heavily touted job growth in June and July come from temporary Summer jobs in fields such as travel and recreation? Won’t it tend to disappear at the end of August, when the holders of most of those jobs go back to school? As for permanent figures, wait ’til September before counting chickens.
American worker productivity is low, because morale is low. Companies are paying as little as they can for talent, most departments are understaffed and overworked. Higher paying jobs are performed by contractors and foreign workers on visas who accept less per hour because compared to what they would make in their countries it is a lot of money. Management is based on favoritism and the “old boy” network so for most workers there is little hope for significant promotion.
As far as the market is concerned, less is more. Losses are not a large as expected so all is well, employment is ok but they thought it would stink, so all is well. Profit margins and year over year sales comparisons are not good but better than predicted so all is well.
The looming bubbles credit, housing, fiscal irresponsibility , may occur sometime in the future but for now Happy Days Are Here!!! LOL
As for the U.S. Dollar losing ground, remember that the Renminbe (Yuan) becomes the number two component of the SDR in September. This seems certain to have a probably negative effect on the buck, Euro and Pound, and a salutary boost to precious minerals. Gold, after all, has a one way track INTO China, with no exit track. What do the Chinese know that we don’t?
On the other hand, re the SDR-
China has the largest quantity of Gold of the four SDR members.
The SDR G 20 meeting on Sept 4 will be in China.
China will chair the meeting.- – – I guess he who has the biggest stick
gets to be the Chairman on the 4th.
however little sense it makes one of my trading rules has been to never bet against the US government. If they are actively supporting a sector (tesla various green energy mafia) or targeting a sector( banks, oil and coal) they tend to set the trend. When in doubt sell half so you’re not on the sidelines and throw 10% into gold miners, gold/silver, real estate so you can sleep at night. I’m a rookie at this but this has done pretty well for me over the last 8 years. I’m very bullish domestic oil if trump wins and regulations can be dialed back to rational, if not would go over seas with assumption Hillary will cripple domestic oil and international will outperform as our production falls.
This is Keynesian economics like in the depression, with many of false starts for 10-15 years. We need to break the pattern by changing the administration. Some of what Trump talks about would be a good start. Creating more money only reduces the demand or velocity.
Reality and logical thinking has never stopped irrational exuberance. The danger to our long-term economic stability is that a speculative buying frenzy erupts in the equities markets that is soon followed by the inevitable catastrophic wealth destruction that no government or central bank will be prepared for or capable of dealing with.
Mike, have you considered the possibility that those who make the market, the large cap investors, have decided to adopt a paradigm shift away from the traditional market ethos as you described in your article to a new paradigm of slow or no growth in the name of sustainability. I watched this market change that has been taking place for the past 15 years.
At first I thought it was an anomaly that could be ascribed to events both here and internationally (the 911 effect). However, there was never a return to the market of the 1990s, instead there was a new market ethos and I watched as incremental changes were being made to various sectors that have landed us where we are 15 years later with reduced standards of living, increased lifestyle costs, and an economy that is barely able to support itself on a good day.
I think that it may be past time to re-think the metrics by which market performance is measured as the standards that were relied upon in the past no longer appear to be relevant.
One week the employment number goes up. Next week the productivity number goes down. Does nationwide productivity really change that fast? Or is the employment number (which is used to calculate productivity) not really as high as claimed? With so many analyst publications and so many opinions being published, I don’t see anyone looking into this relationship. Not even Dent, who likes to tear these things apart.
I have been reading Weiss Research output since 1992.
I have great respect for their ratings of banks, insurance companies and other such institutions, even individual stocks.
However, I have found them to be consistently bearish for the whole time, through good times and bad.
Therefore, I take their macroeconomic views with a large dose of salt.
Betting against the USA has usually been a bad idea.
I remember the Economic Summit in Tokyo 1979 when J Carter gave a speech over Radio Tokyo (broad casted in English, in short wave) where he said …”it is the policy of the US Federal Government to reduce the American standard of living to become more in line with the rest of the world…. By the way, that speech officially does not exist. I checked exhaustively many resources. It was never broadcast on American radio or TV. Well, today that policy certainly has come about.
I certainly hope any new administration changes that policy to something more reasonable for us.
Would not surprise me….just look at the sorry “trade” agreements that our reps have provided over the years that have destroyed us. And this latest one….TPP….the Obama Admin will not even release the terms of it. Treasonous.
This is the truth. I was shocked and tuned to all of the English broadcasts from VOA, AFRTS, BBC, etc. It was never carried on any English broadcasts to America. Even the Carter Library says it does not exist or they have no record of it!
I am a 76 year old MBA graduate and owned several small business. I have never seen economic conditions as bad as this. People should be aware that deflation and inflation can exit at the same time. Prepare to buy sound assets during the bad times. Hopefully they will rise in value during the coming inflation.
Time is money and in an economy with rising living standards, people place an ever higher value on their time. Although there is much disagreement over the valuation of the time lost due to the lower average speed of congested traffic it is clearly an undesirable aspect of travel in the urban areas.
I think people are misinterpreting the productivity numbers. We measure the output in $, not in “units.” In a deflationary environment we can have units rise while the total value fall. Assume I can produce ten widgets per hour at a cost of $10 each. My productivity is measured as $100/hour. Assume now technological advances allow me to raise my production to 11 units but they now only cost $9 per unit. My productivity is now measured at $99/hour for a 1% drop even though I am producing 10% more units… Bottom line, I don’t think anyone has a friggin’ clue what the real productivity really is