A Perfect Pick

361 Capital Market Commentary | October 7th, 2019

Too bad investing isn’t as easy as picking apples this time of year. Instead of perfectly crisp red apples sitting at eye level, stock pickers are more likely to find approaching snow, fruit out of reach and a growling farm dog. This environment is getting trickier as the U.S. and global economy slows further and the outlook for jobs and wages gets darker. The ISM data last week was pretty dismal. Some of the series around the world are starting to slow at an accelerating rate. Remember that the U.S. economy is supertanker sized, and once the ship begins to turn in a new direction, it is not easy to reverse. Many of us would like to believe that eliminating all tariffs and returning to free trade might help stop the slowdown, but it is very possible that we are too late. The poor ISM data gave way to a stock bounce late in the week as the markets shifted quickly toward betting on another Fed Funds rate cut at the end of October. Bad news is good for the markets right now. Let’s just hope the news doesn’t get too bad.

As we head into the earnings reporting period, it will be interesting to hear how the CEOs and CFOs negotiate their conference calls and year-end outlooks. We know from the surveys that pessimism is prevalent in the corner office right now and that difficult hiring decisions lay ahead. Not sure where the trigger for increased optimism would come from. We get another round of China trade talks this week, but few are hopeful for a positive outcome. Brexit and Hong Kong remain a mess. WeWork is pressuring commercial real estate values given how big they have become in many major markets (18% of NYC leasing transactions in 2018). But the silver lining is that as bad as the data and numbers project, the Fed will have our back forever. Right? Zero interest rates here we come. Pick all the apples that you can until credit spreads break higher. Then drop your basket and run.

Consumer confidence might have peaked for this cycle…

“Markets peak when optimism peaks, and market and consumer optimism can frequently peak together. US consumer confidence made major tops in 1988, 2000 and 2007, all periods that were followed by decidedly worse-than-average equity and credit market returns. Today, consumer confidence is high but has started to weaken, a worrying sign that another such peak may be forming.”
(Morgan Stanley)

Weak ISM data last week sent the Fed rate cut probability soaring…

October Fed Rate Cut Probability
(WSJ/Daily Shot)

ISM manufacturing export orders declined at the fastest pace since the recession…

A direct impact from the tariffs and trade wars.

ISM Manufacturing Export Orders
(WSJ/Daily Shot)

There is a tight correlation between new export orders and future ISM manufacturing activity, so expect industrial data to slow further…

More downside risk to ISM in coming months

Railroad companies are beginning to see the recession at the end of the tunnel…

This year’s railroad slump is getting worse as a slowdown in manufacturing threatens broader weakness in the U.S. economy.

There’s no bottom in sight as the decline in carloads for large U.S. railroads widened to 5.5% in the third quarter, the biggest drop in three years, according to weekly reports from the Association of American Railroads. Shipments are down for autos, coal, grain, chemicals and consumer goods, with crude oil the only bright spot.

The rail downturn underscores the damage from the U.S.-China trade war, which is making shippers more cautious and crimping freight — validating earlier warnings from railroad executives. Companies that stocked up on inventory last year amid President Donald Trump’s tariff threats are now working it off. Adding to the cargo drop, a brief rise in coal exports has fizzled and bad weather has delayed crop harvests and dragged down grain carloads.

Railroad Recession

And not just manufacturing, but the ISM services number also slipped sharply…

ISM Non-Manufacturing Index
(WSJ/Daily Shot)

Within the ISM service, the employment series took a big digger…

ISM Non-Manufacturing Indices

ADP is also on top of the slowdown in hiring…

Mark Zandi, chief economist of Moody’s Analytics: “The job market has shown signs of a slowdown,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The average monthly job growth for the past three months is 145,000, down from 214,000 for the same time period last year.” “Businesses have turned more cautious in their hiring. Small businesses have become especially hesitant. If businesses pull back any further, unemployment will begin to rise.”

And as hiring slows, so does wage growth which we saw on Friday…

Average Hourly Earnings of All Employees: Total Private

This is a chart to take seriously…

It shows the difference between U.S. consumer and business confidence. The series is not friendly to the markets when it reaches the current extremes.

US Consumer Confidence Relative to US Business Confidence

The recent portfolio manager survey also shows increased business pessimism…

How likely is it that you think the global economy will experience a recession over the next twelve months?

For the week, it was a defensive one with bonds and gold outperforming equities…

Which sectors outperformed equities

Among sectors, tech and defensive ones outperformed, while cyclical ones underperformed…

Sector Outperformance

REITs have performed well due to stable rents and falling interest rates…

XLRE Real Estate Select Sector SPDR Fund

Home construction stocks have rebounded nicely this year…

ITB iShares U.S. Home Construction ETF

Little reason for the U.S. Government to restart the incandescent light bulb industry…

Yes the bulbs might cost a bit more today, but their cost is in a decline as steep as that ladder you are about to fall off of changing all of those old edison bulbs that go out every few months.

Let there be lightbulbs

Finally, the palm to head stories about the failure of WeWork just won’t quit…

An S-1 is meant to be a bland financial document, but WeWork’s took a different direction. With Adam’s encouragement, Rebekah became unusually involved in the artistic presentation of the document. “The traditional approach to producing an S-1 is bankers and lawyers hashing this out, but the process was continually usurped by Rebekah’s involvement,” one executive said, echoing a sentiment expressed by multiple people who worked on the project. “She treated it like it was the September issue of Vogue.” WeWork had hired a former director of photography at Vanity Fair, and Rebekah insisted on selecting the photographers chosen to take photos of WeWork offices and members, and approved every photo that appeared in the S-1, of which WeWork included many more than most companies that go public. (She wasn’t the only picky one: Adam Kimmel, the company’s chief creative officer, became unhappy with how the company’s offices looked in its official pictures, so new photographers were sent around the world to reshoot them.) As the summer wore on, WeWork employees found themselves making so many trips to meet with Rebekah at the Neumanns’ home in Amagansett that “He’s ‘out east’ tomorrow” became a euphemism for describing a colleague spending their day driving to and from the Hamptons. “The thing that’s so damning about all that is that it’s just not the point of the document,” a person who worked on the project said. “That’s the thing about WeWork: You’re spending all this time working on the surface of it instead of the actual truth of the thing.”

Oh by the way…

Advisors please join my colleagues, Harin de Silva, CFA, Ph.D. and John Riddle, CFA for a webcast on Thursday, October 10 at 4:00 p.m. ET where they’ll be discussing the notable factor rotation that recently occurred and what it means for you. Register Now

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