Mid-Year Market Update

“How in the world can the market be doing so well when everything in Washington seems to be a disaster?”  I’ve been asked this question many times in the past few months, and I think there are two parts to the answer:

  1. With regards to the economy and the markets, things in Washington are better than the alarmist media want you to believe.
  2. Though government policies – fiscal, tax, regulatory, and monetary – are certainly very important to the financial markets, they are not the be-all and end-all.

        Better Than the Media Wants You to Know – I’ve said this many times before: bad news pays.  The media is in the business of selling advertising, and what drives eyeballs to TV and computer screens is the threat of disaster.  It is also overwhelmingly liberal, and absolutely loathes the Trump administration.   Consequently, the media has a financial and emotional interest in portraying almost everything coming out of Washington as the end of days.

In reality, I believe one of the reasons the market has been rallying since the day after the election is that many of the policies that the new administration has proposed could have beneficial effects on the financial markets.  Though attempts to repeal and replace Obamacare are garnering all the headlines right now, the promise of tax and regulatory reform is one of the drivers of this bull market.  Keep in mind that before the election almost everyone believed that Hillary would win, and we would have more of the same constricting policies that led President Obama to be the first president in history to not have at least 1 year of 3%+ GDP growth during his administration.  This has been an almost 9 month relief rally.

 

        The Economy Is an Ecosystem — We frequently hear economists talk about the economy as if it’s a machine: it’s overheating, running out of gas, stalling, etc.  But it’s not an internal combustion engine; it’s an ecosystem.  That is, it’s a complex, dynamic web of billions of people interacting with each to produce profits for themselves and their companies.  And when tsunamis like the mortgage disaster of 2008-09 hit, people adjust.  Bad D.C. policies hurt, but economies recover because people work at it.

 

Future Outlook

 

        Pessimism Is Good – Wall St. legend John Templeton once said “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  Building on Templeton’s observation, Ray Devoe has broken secular bull markets into 6 phases 1) Aftershock/Rebuilding;  2) Guarded Optimism; 3) Enthusiasm; 4) Exuberance; 5) Unreality; 6) Cold water (the bubble bursts).   Our Chief Investment Strategist Jeff Saut believes we are still just in the “Guarded Optimism” phase. [1]  Leon Tuey, formerly of BMO Nesbitt Burns and RBC Capital Markets, concurs:

 

        Although long retired, many fund managers in Europe, Asia, and North America still call me and seek my view of the market.  I can report to you that worldwide, investors are skeptical and fearful.  Most are sitting on a mountain of cash.  As you know, that is very bullish.[2]

 

Scott Grannis at Calafia Beach Pundit has more details on the same theme:

 

        If you want bad news and arguments for why the market is due to collapse any day now, just spend a few hours reading Zero Hedge or browsing the media and punditry. Very few observers these days are willing to pound the table for stocks, considering they have been rising for more than 8 years and are hitting new highs almost every day. Is there anyone who isn’t dismayed that Trump and the Repubs haven’t been able to repeal and replace Obamacare after years of trying? Is there anyone who is confident that Trump and the Repubs will succeed in massively lowering tax rates? I don’t see any evidence that the market is pricing in a stronger economy: 5-yr real yields on TIPS are a mere 0.15%, a level that suggests the market is priced to sluggish growth for as far as the eye can see. Investors are on the horns of a dilemma: it’s tough to be bullish, but it’s also expensive to be bearish. The earnings yield on stocks is still quite high relative to the yield on cash and bond market alternatives; so hiding out in cash means giving up a lot of precious yield. But almost $9 trillion in bank savings deposits paying almost nothing says that there are lots of people who are reluctant to take on market risk. Indeed, when I look at the market, I see more evidence of caution than I do of exuberance. Bill Miller, a long-time friend and former colleague, maintains that the market is still in a “safety bubble” after the shock of 2008. I’ve long observed that real yields on TIPS are miserably low, and for that matter nominal yields on sovereign bond markets nearly everywhere are very low. So it’s not at all obvious that the market is running on fumes.[3]

 

This doesn’t sound like the “irrational exuberance” of Devoe’s Stage 6 .

 

        An Earnings Driven Bull – Warren Buffet’s mentor Ben Graham often stated, “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.”  What he meant was that in the short term the fear and greed of “voters” (investors) drive the market, but in the long run the heavy and ever-increasing accumulation of earnings determines the market’s price.  Leon Tuey believes that this great bull market is only in the early stages of the second leg.[4]  The first leg was from October 10, 2008 and ended in May, 2015, which was driven by an easy/accommodative monetary policy.  The second leg started in February, 2016 which is always the longest and strongest as it is driven by improving economic conditions (due to the monetary stimulation of the past eight years) and accelerating earnings momentum which is what investors are seeing.[5]

 

So far this quarter, 65% of companies reporting earnings have bettered estimates and 67.1% have beaten revenue projections.[6]  For the year, earnings for the S&P 500 are expected to be up 6-8%.[7]

 

        Some Leading Indicators – Credit Default Swaps are one of the better indicators of the health of corporations.  They are not showing stress and trending upwards as they did before the last recession.

The prices of industrial metals are moving up.  Usually they are in decline before a recession.

[1] Raymond James Gleanings, 6/23/17

[2] Raymond James Investment Strategy 7/17/17 click here

[3] Calafia Beach Pundit, 7/20/17

[4] He is referring to the “second leg” of this “secular bull market.”  For a better understanding of this type of bull market, see my blog post of 4/6/17 Stay Rational My Friends.

[5] Raymond James Investment Strategy, 7/17/17 click here

[6] Raymond James Investment Strategy, 7/24/17 click here

[7] Raymond James Investment Strategy, 7/17/17 click here

        In each of the past 5 recessions, new home sales have dropped significantly before the recession started; they have now been in a steady uptrend since 2011.

Finally, how does my favorite indicator – “The Fed Indicator” – look?  As you can see, though the Real Fed Funds rate (the difference the Federal Funds rate and the rate of inflation) and the 1-10 Slope (the difference between the yield on 1-Year and 10-Year Treasury securities) are both moving in the wrong direction, they are nowhere near the levels that have preceded previous recessions.

 

In spite of all the sturm und drang in the media, it looks like we are in the early to middle stage of a long term, secular bull market, with no apparent storm clouds on the horizon.

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison, and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Investing for the long-term does not ensure a profitable outcome. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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Stay Rational My Friends

It’s hard to know what to www.instapax.com believe these days.  Did Trump campaign members conspire with Russia to help win the election?  Did Susan Rice and others in the Obama administration abuse their power to unmask the names of Trump supporters uncovered during sweeps of foreign intelligence data?  Will there ever be any changes to current healthcare laws?  Is Trump’s tax plan dead in the water?  Will the Senate adopt the ridiculously named “nuclear option” to confirm Judge Gorsuch?

Though these are all important issues, they pale in comparison to what I consider to be the most pressing and confusing issue today: exactly WHO is The Most Interesting Man in the World?  Is it the man on the right, who “can speak Russian . . . in French,” whose “signature won a Pulitzer,” and whose beard has inspired “no less than 25 Mexican folk songs?”  Or is it the clown on the left, who kicks a coconut-football between two giraffe uprights like, well, like the Frenchman that he is in real life?  (And do coconuts even grow where giraffes live?)

If anyone can answer these important questions, please email me at don.harrison@raymondjames.com And while I’m at it, is there a secret cabal that has been working for decades in major corporations to destroy TV ads that people actually enjoy watching?  Maybe it’s the work of the DVR manufacturers, since one of the main uses for their product is to avoid ads.  But come to think of it, this goes back to the last days of “when EF Hutton talks, people listen,” which predates the digital era, so I guess that’s not the answer.   (If you want the inside scoop on how the greatest slogan in the history of financial services met its end, let me know.)

With all this uncertainty in the air, it’s more important than ever to remain as rational as possible regarding the investment markets.  First and foremost, stay focused on the long-term.  Our Chief Investment Strategist, Jeff Saut, believes that we are in a secular bull market that started in March of 2009.  As you can see from the chart, the last four bull runs of this type (blue lines) have lasted anywhere from 9 to 29 years, and the total gain has been between 266% and 466%.  This one is currently in year 7 with an increase of 177%.

One of the reasons I believe the current advance has longer to run is because this has been an unusual, slow-growth recovery, as you can see from U.S. Real GDP chart.  GDP would be $3 trillion higher today if the economy had advanced at its 3.1% average annual historical rate during the past seven years.  The recovery has been stretched out, without the typical surge in the first few snapback years, so I think there is a good chance that this could prolong the stock market advance.

I like to focus on leading indicators that have had a fairly consistent record foreshadowing recessions and bear markets.  The one below is my favorite, and is usually called the “Fed Indicator.”    “Real Fed Funds” is the difference between inflation and

the Fed Funds rate, and the “1-10 Slope” is the difference between the 1 year Treasury note yield and the 10 year Treasury bond.  Before each of the last 6 recessions, money was “tight,” with a negative 1-10 slope and Real Fed Funds above 2%.  Neither indicator is close to those levels today.

Each of the last 4 recessions has been preceded by a decline in small business optimism.  As you can see, since the election small business optimism has taken off like a rocket. Since 1975, the only time similar trajectories have occurred has been immediately after recessions and not at this stage of the cycle, which probably says a great deal about how the typical small business owner has viewed the “recovery” of the last 8 years.

So please stay rational, my friends.  Focus on what’s meaningful, and do your best to ignore the media fear mongers.  They will never cease ginning up doom and gloom to sell their advertising.

 

Don Harrison

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison, and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Investing for the long-term does not ensure a profitable outcome. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

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Brexit

       Freedom’s just another word for nothin’ left to lose    “Me and Bobby McGee”, Kris Kristofferson

Rejecting  Kristofferson’s cynicism, the majority of Great Britain’s electorate choose freedom over the prospect of continuing to live under the dictates of unelected European Union bureaucrats in Brussels.   We see this as a vote not just for freedom, but for prosperity.  As the Heritage Foundation has documented for many years (Index of Economic Freedom, http://www.heritage.org/index/ ), freedom and prosperity go hand in hand.  Though there will be short-term dislocations, in the long run we feel the effects of increased freedom in the U.K. should be positive.   The news media is currently buzzing with nothing but the purported disastrous consequences of Brexit; for a more upbeat perspective, see the five commentaries below.  Especially enlightening — and even inspiring — is the speech by Daniel Hannan, Member of the European Parliament.

http://scottgrannis.blogspot.com/2016/06/brexit-is-not-end-of-world-as-we-know-it.html

http://www.ftportfolios.com/blogs/EconBlog/2016/6/6/brexit-is-freedom

http://www.cnbc.com/2016/06/25/brexit-the-uks-magna-carta-20-good-for-freedom-good-for-growth.html

http://www.marketwatch.com/story/7-reasons-not-to-panic-about-markets-reaction-to-brexit-2016-06-24

It’s no wonder “Remain” lost; the best argument its most ardent supporters could seem to muster went something like “yes, the EU has been a disaster, but not as much of a disaster as the U.K. leaving it.”  That’s not a very persuasive sales pitch.

Don Harrison

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison, and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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The Great Depression of 2016

 I confess.  I’m not expecting a depression this year. The above title is a “hook”, and I borrowed it from a book written by Dr. Ravi Batra in 1985 (The Great Depression of 1990 – Why it’s got to happen – How to protect yourself) in order to make a point. I hear the same sentiments in the financial media today that prevailed from the late 70’s to the late 80’s, captured in such immortal works as Crisis Investing – Opportunities and Profits in the Coming Great Depression (1978), The Coming Real Estate Crash (1979), and What’s Next? How to Prepare Yourself for the Crash of ’89 and PROFIT in the 1990’s (1987).

Today it’s The Real Crash of 2016 (2008 Wasn’t the Crash, It Was Only the Tremor Before the Earthquake). Almost all of today’s predictions of an imminent collapse are based on the premise that the economic growth that we’ve had since 2009 – as slow and halting as it’s been – is all the result of the Federal Reserve opening the money floodgates. Once inflation heats up, and they are forced to turn this torrent off, the economy will crash, the U.S. will go bankrupt and gold will soar to $10,000/oz.   And that’s before the government suspends all benefits and seizes personal assets. The chart below seems to show that the Fed – through the various QE programs – has indeed inflated the money supply to an unprecedented degree.Excess Bank Reserves

But this chart shows the growth of bank reserves, not the money supply.  The best measure of the money supply – M2 – does not show this parabolic growth at all.M2 Money Supply

Since 2009, M2 has grown at the same roughly 6% annual rate that it did for the previous 15 years. Why this tremendous disconnect between the growth of M2 and the enormous amount of reserves banks now hold? Why haven’t these reserves worked their way into the economy in the form of loans to businesses and consumers, causing higher growth and extraordinary inflation?

According to Mike Bazdarich of Western Asset Management, this growth in reserves is the result of a series of regulatory requirements that have been implemented since 2008, (e.g., reserves required to collateralize deposits, the risk-weighted capital requirements imposed by the Basel Accords, plus the soon-to-come Fed-imposed requirement that banks hold highly liquid assets (mainly bank reserves) equal to 100% of the amount that Fed stress tests indicate they would need to survive another liquidity crisis). Banks’ demand for reserves has skyrocketed because it’s possible that half or more of the current excess reserves held by banks today is effectively dictated by various requirements and requirements to come, some of which are still difficult to estimate.

In other words, banks have accumulated a mountain of excess reserves not because they don’t want to lend against those reserves but because they had to accumulate them in order to survive. Banks may therefore not be as flush with excess reserves as the numbers suggest. They have responded to changing regulatory burdens by becoming more conservative and hoarding cash. (For a more detailed explanation see Calafia Beach Pundit at http://scottgrannis.blogspot.com/2016_02_01_archive.html

Most of our economic problems today are a result of tax, regulatory, social and educational issues.  They do not stem from a Fed-engineered money deluge.  To see what that looks like, see Scott Grannis at http://scottgrannis.blogspot.com/2016_03_01_archive.html

Don Harrison

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and Scott Grannis and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

 

 

 

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Oil, the Stock Market, and the Folly of Youth

Bearing what all these crazed, hooked nations need, steel plate and long injections of pure oil

                                                                       Gary Snyder,   Oil

Most men, when they reach a certain age, develop a habit of looking back at their youthful stupidity, sometimes regretfully, sometimes fondly. Many of them — myself included — ponder various flirtations they may (or may not) have had. But most men don’t — unlike me — think of their flirtations with bad poetry. I’m not sure what this says about me, but with oil prices much in the news over the past year, this piece of doggerel by “Beat” poet Gary Snyder has popped into my head more than a few times.

I believe I first encountered it as a high school student. At least I have a vague recollection of sitting at my grandmother’s dining room table reading the book of poems that contained Oil. Why would a reasonably normal high school boy spend part of his hard-earned McDonald’s paycheck on a book of poetry instead of, say, a date? Two possible explanations come to mind:

— I had read On the Road by Beat scribbler Jack Kerouac. The novel is essentially a pseudo-intellectual paean to extended adolescence, grown men hitting the road in search of greater truth, but finding mostly easy women and easier inebriation. In this respect, I was normal; what’s not to like for an 18-year old boy? So, anything “Beat” was likely to catch my eye.

— This was, after all, the apocalyptic early ‘70’s. The intellectual luminaries of the day were all Malthusians –disciples of Thomas Malthus, the 18th century political economist who believed that while population increased exponentially, the means of subsistence did so arithmetically, so men were consigned to lives of misery and vice.   Think Paul Ehrlich’s The Population Bomb, or The Club of Rome’s The Limits to Growth. Art Laffer wouldn’t sketch his famous curve on a napkin until 1974 and Jack Kemp wouldn’t write An American Renaissance until 1979, so what else could an impressionable boy do but dance to the tune of one of the pied pipers of scarcity and doom?

Well, it’s 2016, and the oil disaster has finally struck. Our long addiction to what Snyder called a “drug for industrialized society”* has caught up to us, and we’re running out. Gas is $20/gallon at the pump, the 7th Fleet is steaming towards the Black Sea to try to prevent Russia from gobbling up Saudi Arabia, and the Gulf of Mexico is an eco-wasteland, awash in the detritus of hundreds of Deepwater Horizon type disasters as we futilely drill for the last drop.

I’m sorry. All that sturm und drang is just a scenario for a short story I never got around to writing in 1972. We are in the middle of an oil “disaster”, but it’s one brought on by abundance, not scarcity. “Saudi America” is now the largest producer of hydrocarbons in the world, and the worry is that since the production of oil now plays a larger role in our economy, its price decline will have a spillover effect and cause a recession.

Total Petro

As you can see from the chart below, the spread between investment grade debt and lower-rated high-yield energy debt – a measure of distress in the energy sector – has reached levels surpassing those of the 2008 financial crisis, affecting all high yield debt.

Hi-Yield Credit

With many smaller oil companies scrambling to restructure balance sheets and generate cash flow, this makes sense. What does not make sense, I believe, is the worry that these oil patch troubles will lead to a recession. Not too long ago, conventional wisdom said that every recession in history was caused by higher oil prices, and now that wisdom has been stood on its head! Brian Wesbury has opined that this fear is just another example of skittish investors looking for the next “black swan” event that will crash the stock market and the economy. ** One day it’s the PIGS, next it’s China, and now it’s oil.   Oil production is still a small part of the overall U.S. economy, and lower oil prices will have a positive effect in many areas such as chemical manufacturing and consumer spending. Though things “may be different this time,” all the large oil price declines in the past 30 years have been followed by strong stock market returns one year later.

WTI

Source: Hartford Funds

 

* Gary Snyder Interview 6/10/12

** Wesbury 101, Oil and Stocks, 1/26/16

 

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  Keep in mind that individuals cannot invest directly in any index. 

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GREAT GOOGAMOOGA (2)

 

Back in December, I posted a piece entitled “Great Googamooga”, in which I attempted to clear up some of the confusion the news media generates by focusing on a statistic that appears to show an impending recession, when in fact this particular statistic has had a very mixed record as a leading economic indicator. I contrasted these “Misleading Economic Indicators” like the Small Business Optimism Index with more reliable ones such as Real Yields. Here are a few more contrasting indicators.

In the past few months, some commentators have pointed to weakness in the ISM Purchasing Managers Index as a harbinger of bad things to come in the overall economy. In fact, this index is widely misunderstood:

     This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends (Briefing.com)

This index, like so many others, is notorious for false positives.

GG2

Source: Calculated Risk

A number below 50 indicates contraction. As you can see, since 1963, there have been 10 instances (yellow arrows) where the ISM PMI dipped below 50 but no recession followed. In addition, (orange arrows) there were 2 instances where manufacturing was expanding just as the economy was rolling over into a downturn. This is flip-a-coin prognostication.*

In contrast, though Initial Weekly Unemployment Claims (4 week moving average) have given a number of false positives, since 1971 we have never had a recession unless claims have been moving up for at least 6 months. At the moment, Unemployment Claims are still trending lower.

GG!

Source: Calculated Risk

The chart below, New York Stock Exchange Bullish Percent, has nothing to do with the economy, but it does have a pretty good track record calling major market bottoms over the past 20 years, flashing a buy signal near turning points during the Asian Contagion, the Tech Crash and the Financial Crisis. A move below the green line is a buy signal, and right now it’s flashing green. (A full explanation of how Dorsey Wright creates this is in the footnotes.** )

gg3

*Green arrows represent S&P 500 highs.

** “The bullish percent is a measure of the percent of stocks in any universe that are on a Point & Figure buy signal. This percentage is plotted on a grid from 0% to 100%. X’s represent that more stocks are going on buy signals and the offensive team is on the field for that market or sector. O’s represent that more stocks are going on sell signals and the defensive team is on the field for that market or sector. The two lines of demarcation on a bullish percent chart are 30% and 70%. The 30% level and below is the “Green Zone” or low risk area. The 70% level and above is the “Red Zone” or high risk area. Focus on your field position and column for an assessment of risk in that particular market. Bullish percents are a measure of risk in the market, not the direction an index should move.”  Dorsey Wright

*** Graphs are sourced from calculatedriskblog.com

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison  and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and or members.

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Recent Market Volatility

Last Friday, as the Dow Jones Industrial Average hovered around minus 400 points for the day, I started working on a piece regarding the recent market volatility and the widespread perception that China, oil and a misguided Federal Reserve are leading us into a bear market and a recession. I had just gotten started when the following video from Brian Wesbury, Chief Economist at First Trust., arrived in my In Box. Brian not only addresses these issues, but makes some comparisons that I had not considered to the Penn Square Bank failure and the Japanese and Latin American troubles in the 1980’s.

Bottom line: Brian sees this as a buying opportunity.

 

http://www.ftportfolios.com/Commentary/EconomicResearch/2016/1/15/this-is-a-buying-opportunity

 Don Harrison

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and Brian Wesbury and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and or members.

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GREAT GOOGAMOOGA

Oh, great googamooga, can’t you hear me talking to you

Just a ball of confusion

Oh yeah, that’s what the world is today.

The Temptations, Ball of Confusion

 

I used this immortal 1970 Temptations’ lyric in an investment missive a number of years ago (probably 20, but I’d rather not dwell on that), but classics never get stale, and it certainly applies to the markets today.

Turn on CNBC, scan the headlines on Real Clear Markets, or, in keeping with our retro theme, get your fingers dirty with a print copy of The Wall St. Journal, and what you will find is a gaggle of columnists and talking heads citing the latest statistic purporting to show that we are on the brink of disaster. What is usually lacking with these alarms is any sense of how this stat has actually performed over the years as a leading indicator.

Over the last couple months, I’ve been compiling a list of leading indicators, both those that have worked well in the past as bellwethers, and those that seem to offer guidance, but when you dig a little deeper, provide nothing but confusion.

For example, the “Small Business Optimism Index” is probably what Norman Whitfield and Barret Strong had in mind when they wrote Ball of Confusion. Though it has certainly been trending down before each of the last 3 recessions, by my calculations it accurately predicted 8 of those 3 downturns; that is, it gave a number of false positives. (The green arrows are stock market tops, and the yellow ones are these false positives. Shaded areas are recessions.) In the current bull market, if you had followed the emotions of small business owners, you would have quit the market in 2011 and 2012. In spite of this, you will frequently hear pundits refer to small business sentiment when trying to divine the market’s future.

Small Business

The chart below has, at least in the past, been a much more reliable indicator. Commonly referred to as “The Fed Index”, it is a measure of the restrictiveness of the Federal Reserve.   “Real Fed Funds” is the difference between inflation and the Fed Funds Rate, and the “1-10 Slope” is the difference between the yield on 10 yr. and 1 yr. Treasury Securities. Though it gave 2 slightly false positives (being early before the 1970 and 2000 recessions), most importantly, in the last 50 years, we have never had a recession when these indicators look like they do now.

real yield

For many years, one of the best “contrary” indicators of the stock market’s direction has been the actions of foreign buyers. When they are selling U.S. Equities, it’s a good time to be buying. In the last 30 years, there have been 13 instances where foreigners were very pessimistic about the U.S. outlook, and each time, the U.S. stock market was higher a year later. Today, selling pressure from overseas is as high as it has ever been.

Six 2

In the coming weeks, I’ll have more on these types of indicators.

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice

 

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