Stair Climb to New Highs

361 Capital Market Commentary | November 18th, 2019

The financial markets are leaving its worries behind this year as it remains focused on the future. While current economic data remains mixed and forward-earnings estimates continue to be cut, the good news is that there is no visible abyss to fall into like there was twelve months ago. As a result, U.S. equity multiples are pushing higher and international indexes are even breaking upward to make new highs. The fact that so many global markets are pushing higher right now tells you the next move in the world economies will be up and not down. If you need further confirmation, just pull up the charts of these U.S. sector indexes or ETFs: Industrials, Basic Materials, Financials and Technology. All four of these charts are breaking out to new 2019 highs and all have significant economic cyclical components. But the real lift this month could be found in the Healthcare indexes which has to do with the improving expectations for the future political climate, combined with much lower-than-historic valuations. China trade, Hong Kong and the Impeachment testimony is just loud background noise right now. The market has its Fitbit on and is running up two steps at a time.

As Arthur illustrates, stocks are finally outperforming bonds…

Not only is SPY hitting a new high and in a long-term uptrend, but it is also outperforming the 20+ Yr Treasury Bond ETF (TLT) again. Stocks represent risk assets and bonds represent safe-haven assets. The market embraces risk when stocks outperform and turns risk-averse when bonds outperform.

The chart below shows SPY hitting new highs in October and trading well above its rising 50-day SMA. In contrast, TLT formed a lower high in early October and exceeded its September low earlier this month. TLT is also below its falling 50-day SMA. Money is moving out of safe-haven bonds.



Bonds have outperformed stocks due to strong fund flows. Imagine a world where this reverses…

While equities have performed well this year, they had outflows throughout. Since Jan ’18, US equities saw $225bn of outflows, which fully unwound the inflows seen in ’16-’17, vs fixed income that had $465bn coming in. Retail flows have recently started to return, but it will take more than a few weeks of inflows to compensate for the persistent 18 months’ worth of outflows.

Cumulative Flows into Equities

Some very leading green shoots for the global economy are emerging…

@ISABELNET_SA: Global Manufacturing PMI Chart suggesting that the new orders to inventory ratio leads global manufacturing PMI by 2 months

New orders to inventory ratios

And here in the U.S. cyclical stock prices are also suggesting a better economy in 2020…

Although the equity market has started to price an acceleration in US economic growth, we believe the recent rotation has room to run. Based on their historical relationships with our CAI, the broad S&P 500 rally and the rotation to Cyclicals from Defensives both appear to imply an acceleration in the CAI from the current 1.2% to a pace of roughly 2%.
(Goldman Sachs)

Cyclicals vs. Defensive Trade

Among factors, Morgan Stanley thinks growth stocks are done versus value stocks…

Growth vs Value

Barry Ritholtz also pointed out this value chart from BofA Merrill Lynch…

“The only time in history that Value has gotten this cheap was in 2003 and 2008, when Value outperformed Momentum by 22ppt and 69ppt, respectively, over the subsequent 12 months.”
(Savita Subramanian)

Value vs Momentum

The stock market is now responding to these valuation differences in the last month…

S&P 500 Style Analysis

Away from the growth versus value arm wrestle, Healthcare stocks broke out to all-time highs last week…

But this is all due to a continued fade of Sen. Elizabeth Warren in the Democratic nomination polls. While voters rank healthcare as a top issue in terms of who to choose in 2020, they don’t want a mandatory healthcare for all plan. Americans want the system fixed, not replaced. The next president will be the one who shows up with a toolbox full of big wrenches, not a box of dynamite. Now that the markets have realized and absorbed this, the healthcare stocks are marching forward.

Health Care Select Sector SPDR Fund

And this chart shows that Healthcare has remained among the cheaper of the U.S. sectors on a P/E basis…

Tweet from @bespokeinvest

While the market has marched to new all-time highs, it has done so with the help of its top five…

Tweet from @BullandBaird

As a result, there remains a widening gap between the mega-caps and the rest of the stocks in the market…

The gap in valuations between the mega-caps and the rest of the S&P 500 is widening. Here is the P/E ratio spread between the equal-weight S&P 500 and the S&P 500 Index.

S&P 500 Equal-Weight P/E

Forward earnings estimates continue to be trimmed…

So could the market’s new highs be telling us that analysts are behind the curve and will be reversing to raise their estimates in 2020?

Tweet from @EarningsScout

And while stocks are ignoring the China tariffs right now, it is still a significant issue for U.S. exporters…

The Trump administration’s trade war is ravaging exports to China across the U.S. and well beyond the farm belt, new data from the U.S. Commerce Department show.

More than 30 states stretching from Florida to Alaska suffered double-digit drops in merchandise exports to China through September of this year. Sales to the Asian nation fell 39% in Texas, where oil and gas products comprise the largest export to that country.

In Alabama, which touts its status as the No. 3 auto-exporting state in the U.S., total shipments to China plunged 49% in the first nine months. Florida’s merchandise sales to the country slumped 40% in the period, while West Virginia and Wisconsin each saw drops of about 25%. Product exports to China from the U.S. as a whole dropped 15% to $78.8 billion.


State Exports to China

Weaker recent data has caused the Atlanta Fed to cut its GDP model estimate to only +0.3% for the Q4…


And keep an eye on this weakening breakout in jobless claims…

Tweet from @bespokeinvest

On the flipside, Germany narrowly avoided entering a recession last week…

Let’s hope there is not a future revision that would change this.

Tweet from @jsblokland

European stock flows also suggest better economic data may lie ahead…

Funds into European Equity funds

If you are looking for a 2020 Market Worry Checklist, Deutsche Bank has you covered…

20 risks to markets in 2020

Meanwhile, Merrill Lynch is planning out the Top 10 themes for the next decade…

But I am disappointed that I will have to wait until the 2030s to ride in a space elevator.

Merrill Lynch Top 10 Themes
(BofA/Merrill Lynch)

While inflation datapoints have been coming in a bit hot of recent, at least housing costs seem to have peaked…


For my local readers, it looks like the days of the multiple offers and bidding wars have quickly ended…

Home sellers in metro Denver appear to be trying to squeeze every last drop out of a historic run-up in prices. But in doing so, they risk getting squeezed themselves.

In the past seven days, through Thursday, 1,433 new homes and condos came on metro Denver’s multiple-listing service. But in that same stretch, 1,539 listings underwent a price decrease, notes Anthony Carnesi, CEO and manger at Keller Williams Realty DTC.

“The number of price reductions in the six-county area is greater than the number of new listings,” he said.

That’s a rare occurrence, and when Carnesi first spotted it in August, he thought it was an aberration that would quickly resolve itself. But the trend of overpricing has been at play for 14 straight weeks, and he is speaking out.


For those who might be more cautious on the economy, if you live in one of these major cities, you might consider renting versus owning…

The metro area with the highest risk of a real estate dip during a recession is Riverside, California, with an overall score of 72.8 percent, followed by Phoenix (69.8%) and Miami (69.5%). The areas at most risk are many of the same regions where housing was hit hardest by the Great Recession, clustered in Southern California, the southwest, and Florida. These are all areas where home prices tend to be more volatile than other parts of the country. This is likely due to their relatively high loan-to-value ratios, and larger share of the market that is dominated by home flippers. These markets tend to attract a lot of investor activity, which can drive prices up, leading local homeowners to take on more debt to afford homes in their area.

The metro area that stands out the most in the top 10 as unusual is Providence at number five. Providence was in the top 80th percentile or higher in four of the seven risk categories: Average Home Loan-to-Value Ratio, Home Price Volatility, Exports Share of GDP and the Share of Households 65+.


Top 10 Metros

If the Scandinavians are worried about climate change, you had better pay closer attention…

Concerns about Climate Change

Will the trend in “no makeup” finally kill the department store industry?

Hollywood’s fascination with the #nomakeup selfie is starting to take a toll on the cosmetics industry.

After being buoyed for many years by Kim Kardashian — who introduced the American public to face contouring and other makeup-heavy looks — the industry is starting to see sales plunge as more women choose to go au naturel on a regular basis…

What started as a fad appears to have become a movement — and it has Wall Street alarmed.

“I was kind of worried when I saw celebrities appearing in photo shoots not wearing makeup,” D.A. Davidson retail analyst Linda Bolton Weiser recently told The Post.

Weiser made the remark after Estée Lauder reported a 6-percent sales decline in the US on Nov. 12 because of weak demand for color cosmetics. Just a few months earlier, in August, beauty retailer Ulta slashed its 2019 growth forecast — sending the cosmetic seller’s stock down 30 percent.


We are all lucky to have been alive in a world of Tom Hanks…

And if Oscars were given to articles written about actors, this would be the 2019 winner. What a great pen here, or maybe even a typewriter?

The day after Hanks’s new movie, “A Beautiful Day in the Neighborhood,” in which he stars as Mister Rogers, debuted at the Toronto International Film Festival in September, he was sitting on a bench in a hallway outside a conference room, making jokes to a group of publicists, waiting for me ahead of the appointed time. That does not really ever happen, an actor waiting for me ahead of the appointed time, versus clearly dreading me two hours past it. “I think a long time ago, I learned how important it was to show up a little bit early,” Hanks told me. “Be ready to go, you know? And to respect the whole process, and I think that you could respect the whole process even when the other people don’t.”

So Tom Hanks is as nice as you think he is and exactly what you hope him to be, which is great unless you are someone trying to tell a good story about him, with elements like an arc and narrative tension. “Saintly Actor Playing Saintly Public Television Children’s Host Mister Rogers Is Saintly” is not a great story. But what am I supposed to do? He sat facing me, cheerful and focused and willing. Maybe this could just be a story that makes you feel better.


Tom Hanks
(Daniel Dorsa/The New York Times)

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