The S&P 500 Index established a new all time record high on the 26th of July, by closing above 3,000 for the first time, at 3,025.86. (1)
Over the course of the fourth quarter in 2018, I had conversations with many of you, and wrote many opinions that were posted to social media and sent by email, about the assumptions that were being priced into market valuations at that time. The S&P 500 Index fell from 2,924 on the first of October, and closed with a value of 2,506 on the 31st of December (-14.29%). It had been as low as 2,351 on the 24th of December (-19.59%). (1)
Throughout the fourth quarter of last year, I suggested to you that in my opinion, fears of recession had been overly priced into valuations. Over the last two quarters since, economic metrics have proven to be much more solid than previous feared.
Once again, the market is reacting to an event that occurred today for the first time since 2007. The two year and ten year treasury yield curves have inverted at the same time. This means that higher yields are found with shorter maturities than with longer maturities. Generally, this has been an indicator of a recession ahead.
I can’t guarantee that such won’t happen. However, in my opinion, I believe this inversion is a false positive.
Earlier this week, the market reacted sharply to an exorbitant amount of international money that flooded into US treasuries as three central banks across the globe cut interest rates simultaneously. The US treasury looks much more attractive on international markets than the German bund for example, with a negative -0.60 basis point yield.
As demand for US treasuries rises, yields fall. We’re at an October 2016 low on the 10 year treasury yield, due in part to the sudden influx of foreign investment, and the assumption that trade negotiations with China will devolve into a trade war that will precipitate a recession in the United States. (11)
Again, I can’t guarantee such won’t happen. However, I can point to these quantifiable metrics a the present time.
July 30, 2019 – The Conference Board’s consumer confidence index registered 135.7. This is one of the highest readings since 2008. (3)
August 2, 2019 – The Labor Department reported that 164,000 jobs were created for the month of July, and 193,000 were created for the month of June. The unemployment rate remained steady at 3.7% (2)
August 8, 2019 – Weekly jobless claims were 209,000 for the previous week. If you’ll click on the link under sources for (4), and click on the 10Y chart, you’ll see how impressive the trend has been. The most recent report is only a few thousand claims higher than a 49 year low established in April of 2019 at 198,000.
July 30, 2019 – Personal income rose 0.4% month over month, and spending rose 0.3% month over month. Supervised wages grew by 3.1% year over year – and for a 9th straight rolling one year period of time – this was the best year over year increase since 2008. Let that sink in. Out of the previous 120 rolling one year holding periods in a decade, we just observed the 9 best – in a row – over the last decade. (5)
Those in the supervised wages category comprise roughly 60% of the wage earning public. (12). They’ve just seen their income rise by the best year over year amounts over the last nine straight months than they’ve seen in a decade. Consumer confidence is near a ten year high. Spending is also strong. See the correlation?
You don’t observe metrics like these if you’re about to tip over into recession.
August 5, 2019 – The ISM Non Manufacturing Index remains in expansion territory at 53.7. (6)
August 1, 2019 – The ISM Manufacturing Index remains in expansion territory at 51.2. (7)
August 2 2019 – Factory orders are higher by 0.6% (8)
August 6, 2019 – Redbook retail sales year over year change is a positive 5.1% (9)
July 26, 2019 – Gross Domestic Product Q/Q change was higher by 2.1% annualized. Real consumer spending Q/Q annualized was up 4.3%. Nominal GDP Y/Y was higher by 4.1%. (10)
Weekly jobless claims are near 50 year lows. An unemployment rate of 3.7% is consistent with being considered at full employment. Supervised wages are growing at the fastest rates we’ve seen in ten years. Consumer confidence is as high as we’ve observed in ten years. This is translating into strong patterns of consumer spending. Consumer spending is 70% of Gross Domestic Product. These trends are showing signs of strengthening, not weakening.
You don’t get a recession when economic metrics look this strong.
As we saw in the fourth quarter, markets will price assumptions into themselves that may defy quantifiable reality. As we’ve seen over the previous two quarters, when those assumptions don’t materialize, the markets will recover.
Also, remember that we live in a new paradigm where a tweet can cause the market to reprice risk violently, and without warning. We saw that last week when the market swung by 600 points in two hours following a tweet about a new 10% tariff on $300 billion of new Chinese imports. (1) (13)
The best advice that I have for all investors, is that now more than ever, you must maintain a long term perspective on the objectives you’re trying to accomplish. Yes, the environment is volatile, but volatility presents opportunities, and you’ll miss every single one of them if you’re complacent on the sidelines.
Buy through the dips. Be aware of economic cycles, and take media sensationalism with a quarry sized grain of salt. As always, call with questions or needs of clarity.
(13) – National media reviews of tweet from President Donald Trump August 1, 2019