Sean D. Emory
ARE WE THERE YET?
A lot has been asked regarding where are markets, whats the medium-term look like, and are we out of the woods yet. I wanted to touch on this for a second this morning.
Where are markets?
When we take a step back to look broadly at market conditions one way to judge movements is through the lens of global markets. Given globalization over the last decade, economies and markets are more tied than ever. The chart below shows the 1-year trajectory of major markets. Since peaking in January/February of 2018, most markets never recovered. The US markets seemed to march at their own beat on the back of what I perceive as the tax put. Economic activity in the US was strong, and many investors seemed hopeful. Today that divergence in markets is now turning into some form of catchup or convergence. This does not mean markets were wrong before, or that they are right today, this is just what is taking place.
What's medium-term look like?If earnings drive markets overtime, and earnings are a function of the economy, then we have to consider economic leading indicators as a source of direction. Below shows two different leading indicators. One is the OECD, and the other is the Conference Board. The indicator that makes up the Conference Board indicator are things like jobless claims, ISM new orders, stock prices, consumer expectations, and others. Below is a 12 month change in the leading indicator which gives us a clearer observation of trend. Both are trending somewhat lower, but remain at the high end of a 4 year uptrend, and remain within a growth rate since 2010.
In addition, a function of economic activity stems from the availability of loans. While debt levels can be elevated across an economy, the growth only suffers when debt becomes restrictive. With that, here's two charts. The first are loan surveys which highlight that banks remain loose for commercial and industrial loans, but actually tighter for credit cards.
Loan Surveys (higher means tighter, lower means looser standards)
The second chart shows loan growth at the 4 main US institutions. Banks like JP Morgan continue to loan, while Wells has become more strict in its underwriting.
Bank Loan Growth Data
So it is pretty clear that leading indicators remain firm, but caution that they are starting to moderate. Loan data suggests that lending remains loose, which will likely extend economic conditions out. It took around 18 months for the 2008 recession to hit after lending dried up. Also, leading indicators remain positive year over year which is a solid sign.
Are we out of the woods?
There's a lot of things we look at to try and determine short-term selling/buying exhaustion. Instead of going through those today, let's just look at the charts for 5 components. The S&P, vix, high yield, long bond, and micro-caps. What we want to see are the 3 risk markets take out the prior lows, while the risk off markets take out the prior highs. As it stands right now, the S&P is sitting just above that prior low. This needs to hold and high yield and micro caps need to follow. Vix has broken below prior highs, which is a constructive action. At the same time, the long bond has failed to make a new high during this entire mess.
S&P Chart in Focus
While we aren't technicians by trait, we do think it is prudent to observe critical levels of support or resistance. The last chart is the S&P chart. What we see is a clear bounce off the lower support region dating back to February. While it wasn't a clean touch, it shows that the level has some form of significance to traders. As we approach the middle of this range, the risk is more balanced, and we want to see the other markets as shown below follow suit.
MarketSmith chart can be found here
Over long periods of time markets tend to move with corporate fundamentals. So far earnings have come in strong and leading indicators suggest that economic activity is and will remain steady for the foreseeable future. If you follow me closely then you know that I have had a hard time believing strong reports from Visa, MasterCard, PayPal, banks, and Microsoft suggest a downturn is near. The shorter-term picture is more uncertain, and it's this that has created opportunity over time. We will be watching short-term indicators, medium-term economic activity, but remain focused on the companies we own for the long term.
Disclaimer: This is not a recommendation for purchase or sale of any securities. Avory is a not a shareholder of either company, but this can change at anytime.
AVORY & CO. IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY. PLEASE SEE FULL DISCLAIMER HERE