- S&P500 – A Golden Cross is Coming: First up is a quick check in on the recent price action; last week the S&P500 managed to hold that critical 2800 level… which at this stage is tentatively looking like the new floor/support level. But probably the more interesting thing in this chart is how the market is on the cusp of putting in a golden cross (when the 50-day moves above the 200-day moving average).
The “golden cross” is a slow moving signal which is designed to diagnose whether a market is in an uptrend or downtrend, so keep watch for that. I will talk more about this signal and how it’s looking with regards to global equities also, later in the week.
Bottom line: The S&P500 is on the cusp of putting in a golden cross.
- Bearish Breadth Divergence Continues: And as bullish as that previous chart was, this one is decidedly on the bearish side. It’s a classic case of what technicians call “Bearish Divergence” i.e. where price makes higher highs and the breadth indicator makes lower highs. It is a sign of some sort of underlying weakness in the market, As I noted on Twitter, these divergences can resolve in a benign fashion, so it’s not a done deal by any means, but something to be mindful of.
Bottom line: The bearish breadth divergence signal continues to loom.
- Institutional Investor Confidence: The next chart shows the State Street investor confidence index for North America – this indicator is built off actual activity by institutional investors in the custodian accounts of State Street’s multi-trillion dollar global custodian business. Basically this indicator collapsed during the correction and stayed low, indicating that institutional investors substantially de-risked going into and out of the correction, and have been very reluctant to add risk.
The bulls will say this is a good thing because it amounts to potential future buying (aka “cash on the sidelines”). The bears will say it’s a bad thing because institutional investors are better resourced and can see the writing on the wall. I think it’s actually probably a mix of both.
Bottom line: Institutional investors have been reluctant to re-build exposure to risk assets.
- US Yield Curve Outlook: One concern that has been plaguing investors in the last couple of weeks is the topic of the Yield Curve. The concern is that an inversion in the yield curve is a major signal of a recession and bear market. Much of the focus has been on the 3m vs 10yr, but a more traditional version (in my mind at least) is the 2yr vs 10 yr.
In this respect, we still have not yet seen inversion in the yield curve as defined by this version. The chart below shows how there has indeed been flattening in the curve, but it is still not quite there. That said, as this leading indicator (and a few others I have) show, we should expect the 2’s 10’s curve to invert in due course also.
Bottom line: The other yield curve (2’s 10’s) is still yet to invert.
- So-What About Yield Curve Inversions? A nice follow-on chart, this one by Ryan Detrick of LPL Financial shows what happened the last 3 times the yield curve inverted. Not only is it not an *immediate* death knell, it can actually be followed by a decent period of solid performance.
This is the challenge of late-cycle investing. Everyone wants to jump off the ride before it ends, but sometimes the ride can go on longer than you expect and folk end up left behind. There is no easy answer to late-cycle investing conundrum, you either have to be ok with getting off too early or too late, or be very confident that you have a reliable process that will help you find some sort of middle ground.
Bottom line: The yield curve is not an immediate death knell for markets.
- Quarterly Earnings Trends: Next chart from FactSet shows the drop in EPS estimates through the first quarter. It’s the worst drop in earnings since Q1 2016. All sectors saw declines, but those with the largest declines were Energy (-34.0%), Materials (-16.3%), and Information Technology (-8.3%). This trend will hit the YoY picture particularly hard given the base comparator is overstated by the impact of the corporate tax cuts this time last year.
Bottom line: Expected earnings took a dive in Q1.
- Earnings and Sales Growth: This chart by Charlie Bilello shows the path of growth in actual earnings and sales. As I noted, the tax-cut washout is likely going to overstate the weakness in earnings growth, and all but guarantees an earnings recession. This is particularly so given how sales growth has also softened (tax cuts help EPS more than sales – the impact on sales is more indirect, vs direct for EPS). The bulls will tell you not to worry because this is all well known information and has arguably already been priced in. The risk is that it gets worse.
Bottom line: Earnings (and sales) growth has decisively rolled over.
- S&P500 Earnings Growth – Leading Indicator: Sticking with the topic of earnings, Mikael Sarwe of Nordea Markets shows how their leading indicator is pointing to a further drop in forward earnings growth. So when you combine the high base comparator (from tax cuts) with a softer economic pulse, it seems a near certainty that an earnings recession is on the cards.
From a practical standpoint, again, this may already be in the price, so it leaves open questions about the severity/duration of the earnings recession and on the other hand, takes you back to the Fed – where a sufficiently dovish pivot may well offset this.
Bottom line: It looks like an earnings recession is all but guaranteed.
- Asset Managers – Relative Performance against the S&P500: This chart is interesting for a couple of reasons. Firstly is the cyclical component. You can see asset managers have been underperforming over the past year – given this is one of those super-cyclical or hyper-sensitive parts of the market, trouble tends to show up here first e.g. 2008, 2011, 2015, and the turn of 17/18. But on that note, it almost looks like it’s in the process of bottoming.
As for the structural/trend component, you can probably draw or visualize a downtrend line through the chart, this reflects a number of challenges facing the industry e.g. consistent and increasing pressure on fees, the flight to passive, demographic trends (shift from growth to income focus by baby boomers), and the rise of quant investing. Basically this is an industry which is dealing with seemingly entrenched deflationary forces.
Bottom line: Asset managers have been underperforming on a cyclical and structural window.
- The Evolution of Equity Markets Over Time: File this last chart in the interesting category. it shows the evolution of global equity markets over time (i.e. market cap weight of the major countries). A flippant observation would be to say that the moral of the story is to not fight wars (as European countries dominated prior to world war 1. Or perhaps more to the point, don’t lose wars – as the USA found a post-war surge in both the 20’s and late 40’s.
Another observation is, aside from the pre-WW1 period, and aside from the big bubble in Japan in the 80’s, the USA has basically dominated global markets through recorded history. I suspect this will change in time, but I wouldn’t be counting out the market primacy of the US any time soon.
Bottom line: US has dominated global equity markets through most of recent recorded history.
So where does all this leave us?
This week there
- Short-term (contrasting) Signals
The short-term signals include the S&P holding the 2800 level, and the impending (not yet though) golden cross signal, yet set against this is the cyclical underperformance of asset managers and the bearish breadth divergence.
- Yield Curve (non)Inversion
On the yield curve, I note how the 2’s 10’s part of the curve is still in the positives, and though I expect it to invert, it has not done so just yet. However even when it does invert, this is not historically an instant stop button for the markets, but it does highlight the challenges of late-cycle investing.
- Earnings Recession
An earnings recession seems all but guaranteed at this point as earnings growth has decisively rolled over, the tax cuts of 2018 provide a high hurdle for year-over-year comparisons, and a softer economic pulse also weights. But I wonder if this is not already common knowledge (in the price?).
Late-cycle investing is not easy, there is no easy answer. When it comes to timing the end of a market cycle you have a choice of being too late or too early. The yield curve angst, earnings recession, and barrage of headlines/noise makes it seem like being bearish is the easy option, and from my read (anecdotes, surveys, and statistics) bearishness is for the most part the dominant mood. But again, sometimes the easy option is not the right option. And again, with some conflicting signals on the market outlook even in the short-term picture, there are no easy answers.