Put together these ingredients: The biggest weekly market
decline in two years, the winding down of earnings season, and a
light week for economic data. The result? Financial TV producers
will be seeking experts to explain whether we are starting a major
correction. Analyzing the Fed will be a favorite theme.
Unless and until we get a bit of a rebound in stocks, I expect a
focus on this question:
Will it all end badly?
Prior Theme Recap
In my pre-vacation WTWA
that attention would turn to corporate earnings. That was accurate.
I also expected that earnings would probably surprise to the
upside. So far, so good. I noted that the market had digested a
fair amount of bad news. True enough. Finally, I asked whether this
might reignite the stock rally. In my final thought, I emphasized
the need for right-sizing positions in the face of risk.
The upside breakout in stocks did not occur, and the focus has
shifted back to what might be wrong in the world.
Naturally we would all like to know the direction of the market
in advance. Good luck with that! Second best is planning what to
look for and how to react. That is the purpose of considering
possible themes for the week ahead.
San Francisco Appearance
I have agreed to speak at the
San Francisco Money Show
in three weeks. Here is
. I am working on some special themes. We will have some fun and
also identify some good investment ideas. I look forward to meeting
some readers in person.
This Week's Theme
The stock market finally broke from the recent quiescence. Doug
captures the week
in a single great chart. Things were quiet for my return from
vacation - at least until Thursday!
What was the cause of the decline? Let us start with what does
not make sense, including most of the explanations offered. We saw
the typical pundit parade both on TV and from major print and web
media. Anyone who had a bearish theme over the last year or so got
some exposure. I watch a wide variety of sources, but some of these
experts came out of nowhere. Each has a method that has "always"
worked when three or four elements happens together. You cannot
find the experts with a web search, so there is no ability to check
their track records. That does not prevent writers needing a story
from featuring the scariest news.
There was some fresh news on Thursday, perhaps enough to spook
some nervous traders. First, the
employment cost index
was up 0.7% for the quarter. Put aside the idea that many have
argued the need for better wage gains. This single reading (2%
year-over-year) was trumpeted as news that Yellen was wrong about
labor market slack. Higher interest rates would be coming soon,
etc. This was not confirmed by hourly wage data on Friday, but the
damage was done. Second, the sanctions against Russia are
ratcheting higher. For financial markets, the question is how this
affects trade and the European economy.
I expect more of the same worries to be featured at the start of
next week's trading. Here is a simple guide to the negative
- The issue. In the most recent CNBC survey of "Wall Street
Pros" more than 1/3 of respondents said that the Fed's current
policies would "end badly" and another ¼ thought the outcome was
a toss-up. Confirming this, about half of those responding
believe that the Fed is too accommodative. The survey results are
consistent with the daily commentary from many sources. (See
and also the
- The criticism of Fed policy makes its way to investment
clients. Their skepticism is described by
Steven Russolillo in the WSJ
- The combination of policy issues and weaker stocks has bears
out in force. See
Rob Copeland's WSJ piece
or simply turn to the lead page at your favorite finance site.
The first sign of selling is cited as confirmation of a wide
range of theories about valuation, divergences, market cycles,
and assorted indicators.
There are also some important counter-arguments:
- Fed forward guidance can have a real economic effect, perhaps
more powerful than QE. Mark Thoma has an
that shows the importance of Fed credibility about the future
course of short-term rates.
- Stocks continue to rise even after the start of interest rate
analysis from Barry Ritholtz
When we analyze the data, we find that almost three-fourth
of the time when rates were rising stocks tended to rise as
well. When we looked at the conditions during these periods of
rising stocks and rates, we found that the 10-year bond yield
averaged 5.11 percent, the price-earnings ratio of the S&P
500 averaged about 15, and inflation as measured by the
consumer price index was more than 4 percent. The average
S&P 500 increase during these periods was almost 21
- Calm markets are not more susceptible to declines. (Data from
As usual, I have a few thoughts to help in sorting through these
diverse viewpoints. First, let us do our regular update of the last
week's news and data. Readers, especially those new to this series,
will benefit from reading the
Last Week's Data
Each week I break down events into good and bad. Often there is
"ugly" and on rare occasion something really good. My working
definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences
are not relevant for this test. And especially - no
- It is better than expectations.
Most of the important news last week was very good.
hit a three-year high.
has discussion as well as the chart below. Scott Grannis also
looks at the index showing the
relationship to GDP
(click to enlarge)
continued to be strong.
a terrific 74% earnings beat rate and 65% beats on sales. The
year-over-year growth is 7.5%.
shows even stronger growth. The confirmation of earnings growth
also supports the forward earnings estimates. I know that many
are skeptical of this approach, but perhaps they should look at
the data (also from FactSet).
(click to enlarge)
the Ford F-Series truck sales, a useful proxy for construction
and small business. The level is the best since 2006, despite the
impending changeover to a new model.
The PCE index
shows only 1.6% year-over-year growth. This is the Fed's
preferred measure of inflation and it is well below the 2%
target. See Doug Short for
full analysis and charts
Conference Board consumer confidence
was strong. The data help us to understand job creation,
complementing the information about job losses that we get from
the initial claims series.
Ed Yardeni explains the relationship
and provides this chart:
remained strong. The report was mixed versus expectations - a
slight miss on the net change in payroll jobs and an uptick in
unemployment, but better labor force participation and a reversal
of the part-time job worries. The overall story is one of
continuing modest growth, but not yet close to the goal line. It
seems to provide support for Fed Chair Yellen's viewpoint (See
Jason Lange at Reuters
) that there remains some slack in the labor market. (See
Phil Izzo's WSJ update
showed 4% growth, handily beating expectations. Putting the first
and second quarter together suggests a continuation of modest
growth similar to the past two years. There is a continuing
question about what can drive a higher level of economic
has the thorough examination we would expect from him, with the
hopeful note that this could be the first in a string of better
reports. Here is his chart of the contributors to growth:
Consumers are borrowing again
. The end of deleveraging is a market-friendly development. (See
There was also some negative news.
With a near-term focus on trading, I am especially interested in
what I can learn from Charles Kirk. His
weekly chart show
is members-only, but the cost is minor compared to the value.
Without giving away his story, let's just say that Charles is
wary and watching possible bearish setups. Even if you are a
long-term investor, it helps to know what levels are viewed as
Congress goes on recess.
Some would see this as good news. What's another five weeks after
the most unproductive legislative stretch in history? A few years
ago it was popular for market participants to view Washington
gridlock as good. This may have been based upon earlier eras when
there was a partisan split between the Executive and Legislative
branches. This often led to bipartisan compromise and moderate
policies. Things are different now.
From The Hill
A measure of members' ideologies developed by political
scientists Howard Rosenthal and Keith Poole finds that Congress
is more polarized now than at any time since the end of
Reconstruction in the 19th century.
show the number of centrist members in both parties has
fallen from around 40 percent in the early 1980s to under 10
"The effect is rather complete policy paralysis," said
Rosenthal, a professor at New York University.
"They don't talk because they're just so ideologically
opposed," he said.
Absent negotiations on legislation, both sides now seem to
take increasing delight in lobbing blame at each other.
Argentina defaulted on its debt
Or maybe not. It depends upon your source. We'll know soon
whether holders of credit default swaps collect. For the rest of
us, it does not seem to be a question of solvency. (See
Pending home sales
were weak. Prices are also soft and entering a seasonally weak
period. (See Calculated risk
China housing prices
dropped 0.8%, the third straight month of decline. The pace is
Sanctions on Russian banks
may now threaten other markets. So say the banks. (See
). The impact led to a
big weekly loss in German stocks
is at a four-month low.
Doug Short has the story
, and my favorite chart on this important measure.
(click to enlarge)
There are continuing conflicts, violence and death competing for
our attention. The Ebola crisis, cited a few weeks, ago has entered
a new stage. The disease has spread to Lagos, a densely populated
city of 21 million and a center for travel. Gwynn Guilford at
a detailed report
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes
up an unpopular or thankless cause, doing the real work to
demonstrate the facts. Think of The Lone Ranger.
No award this week. Maybe before next week someone will point
out the obvious problems with this chart:
(click to enlarge)
Whether a trader or an investor, you need to understand risk. I
monitor many quantitative reports and highlight the best methods in
this weekly update. For more information on each source,
Recent Expert Commentary on Recession Odds and Market
: An update of the regular ECRI analysis with a good history,
commentary, detailed analysis and charts. If you are still
listening to the ECRI (2 ½ years after their recession call), you
should be reading this carefully. Doug includes the most recent
ECRI discussion, which has been consistently bearish, including the
blown call on the recession. Doug Short has a new version of his
"Big Four" chart. It has now been
updated for real personal income and the employment
Updates his unemployment rate recession
, confirming that there is no recession signal.
Georg's BCI index
also shows no recession in sight. For those interested in hedging
their large-cap exposure, Georg has unveiled a new system. Georg
now has another new program, with ideas for
minimum volatility stocks for tax-efficient
. He also has new advice for those seeking a
safe withdrawal rate
Bob Dieli does a
(subscription required) after the employment report and also a
monthly overview analysis. He follows many concurrent indicators to
supplement our featured "C Score." One of his conclusions is
whether a month is "recession eligible." His analysis shows that
none of the next nine months could qualify. I respect this because
Bob (whose career has been with banks and private clients) has been
far more accurate than the high-profile TV pundits.
: A variety of strong quantitative indicators for both economic and
market analysis. Dwaine's
"liquidity crunch" signal
played out as projected. His market timing method is "armed for the
next possible long signal."
Nikki Kahn at The Washington Post has a great
feature article on FRED
, "every wonk's secret weapon." Readers of our Quant Corner have
all seen charts from FRED. In my first uses of this great resource
I was still visiting via a dial-up modem! FRED has changed both in
the exhaustive coverage of data and the ease of use.
shows some favorite charts from leading economic observers. They
are all interesting, but I especially liked this one from Cardiff
Garcia of FT Alphaville. It shows the trends in manufacturing and
construction employment, converging before 2007, but sluggish now.
Very interesting, and not obvious from most discussions of
(click to enlarge)
The Week Ahead
We have a very light week for economic data.
The "A List" includes the following:
- Initial jobless claims (Th). The best concurrent news on
- Trade balance (W). June data that will affect Q2 GDP
The "B List" includes the following:
- ISM Services ((
)). Good read on the larger part of the economy.
- Factory orders . June data.
- Wholesale inventories ((
)). More June data with implications for GDP revisions.
Earnings news will have some effect, with about 25% of the
S&P 500 still to report. Events in any of the world hot spots
will also command attention.
With the FOMC meeting behind us, the Fed participants will be
free to hit the speaking circuit. Some believe that the message is
orchestrated. That was true of the Greenspan Fed, but less so now.
The modern Fed has plenty of transparency, including the divergent
views of members. Surprisingly, I do not see anything on the
calendar. We shall see.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I
prepare for the coming week. I write each post as if I were
speaking directly to one of my clients. Each client is different,
so I have five different programs ranging from very conservative
bond ladders to very aggressive trading programs. It is not a "one
size fits all" approach.
To get the maximum benefit from my updates you need to have a
self-assessment of your objectives. Are you most interested in
preserving wealth? Or like most of us, do you still need to create
wealth? How much risk is right for your temperament and
My weekly insights often suggest a different course of action
depending upon your objectives and time frames. They also
accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix has remained neutral with confidence greatly reduced.
Uncertainty remains high - typical for a trading range market. This
week we were only partially invested at first, but fully invested
by week's end. This is a bit deceptive, since one of the positions
is in bonds and only one is in US equities. Felix remains
Brett Steenbarger notes
the recent weakness in junk bonds, an indicator of reduced market
tolerance for risk. If Felix could read, he would certainly follow
Dr. Brett. If you are a trader, you should, too.
Adam Grimes warns
that trading is a lot harder than you think. More of it is random
and unpredictable. Here is a meaningful quote:
There are things that work in trading, but they probably
don't work as well as you'd like to think.
A corollary to that is:
most people lie.
The guy you are talking to in that trading room who tells you how
he has made money every day for the past 5 years buying a
candlestick reversal off of a moving average? He's almost
certainly lying. The guy trying to sell you the trading course
that promises to reveal "insider secrets" and how to make $33,871
in 30 days? He is also lying. The guy calling out trades every
day in stocks? He's probably trading 100 shares.
You can sign up for Felix's weekly ratings updates via email to
etf at newarc dot com.
Insight for Investors
I review the themes here each week and refresh when needed. For
investors, as we would expect, the key ideas may stay on the list
longer than the updates for traders. The current "actionable
investment advice" is
. In addition, be sure to read this week's final thought.
The market has finally provided some volatility. This is
attractive for long-term investors who have a good shopping list.
We may some position changes and also added to our Enhanced Yield
versus near-term short call options). These new positions are best
established on down days.
Here are some key themes and the best investment posts we saw
It is a great time to be an individual investor. Tadas Viskanta,
our go-to source for what is happening in financial markets, wrote
on this theme thirty months ago.
His update at The Big Picture
reviews how the original concept played out. Many have joined his
conclusion, highlighting lower costs and greater opportunities.
This is a post that deserves a careful read.
Beware the "popular stocks"
says Patrick O'Shaughnessy
. He suggest that value investors look elsewhere, and provides some
Jonathan R. Laing, in a Barron's cover story, asks
Can ETFs Be Derailed?
He analyzes some problems with intra-day liquidity. His informative
look at the relationship between the ETF price and underlying
shares is an important topic for ETF investors. Felix and I have
noticed some apparent large discrepancies, and we stick to the
high-volume, high-liquidity funds.
Beware of reading entertainment and confusing it with investment
Noah Smith provides
some great examples, emphasizing those who mix in some politics to
gain extra attention. He reviews predictions from some popular
sources. There is no good way to summarize this analysis of the
clash of the self-taught Austrian economists, but you will benefit
from reading it.
If you are worried about possible market declines, you have
plenty of company. This is one of the problems where we can help.
It is possible to get reasonable returns while controlling risk.
You can get our report package with a simple email request to main
at newarc dot com. Also check out our recent recommendations in our
new investor resource page
-- a starting point for the long-term investor. (Comments and
suggestions welcome. I am trying to be helpful and I love and use
General investment commentary seems to get even worse at times
of market stress. The competition for readers or viewers gets even
more intense. Have you noticed that extreme opinions become the
norm? The Fed story has been the popular recent example.
Investors can be better consumers of this information with a
little help from two insiders, Josh Brown and Jeff Macke. During my
vacation I finished reading their entertaining and informative book
Clash of the Financial Pundits: How the Media
Influences Your Investment Decisions for Better or Worse
. I plan to do a complete review, but it is especially timely right
now. As you watch or read the news next week, you should realize
the pressure on pundits to be bold, dramatic, and confident - even
when their forecasts are a bit shaky. The financial incentives
range from selling products to building a big reputation. Their
analysis of these forces is supported with some compelling evidence
from both history and interviews.
Reading this book is inoculation against hype, and it is also a
lot of fun.
As so often happens, if you merely looked at the news last week,
you would never have predicted the market result. Economic and
earnings fundamentals remain sound. Recession risk is low. I expect
things to stabilize, but I am not surprised by increased
volatility. The story of the change in Fed policy will play out
over the next two years, with plenty of chances for both traders
The author has no positions in any stocks mentioned, and no plans
to initiate any positions within the next 72 hours. The author
wrote this article themselves, and it expresses their own opinions.
The author is not receiving compensation for it. The author has no
business relationship with any company whose stock is mentioned in
Is It Time To Invest In Extended Stay America?