While investors were poring over Federal Reserve Chair Janet Yellen’s testimony this week, Societe Generale chief strategist and permabear Albert Edwards continued to be annoyed that the Fed was looking at payrolls, which he says is a lagging indicator. He’d much rather talk about deteriorating US profits and the laundry list of US economic misses this month.
“We have been highlighting a savage deterioration in US profits and the February IBES aggregate data shows the decline has accelerated. My colleague Andrew Lapthorne highlights that, typically, this rate of earnings slump is normally associated with outright US recession,” Edwards writes.
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S&P 500, US macro surprise index moving further apart
Albert Edwards points out that the S&P 500 has hit a new record high while the Bloomberg US macro surprise index has fallen to the lowest point in nearly a year.
If that graph looks familiar, it’s because we were in nearly the same situation a few years ago, when US macro surprise fell to five-month low and the S&P 500 hardly registered a change, and we all know how that ended up – with a bull market that smashed expectations.
That’s not to say the divergence is a good sign, or that the 2013 bull market was justified by market fundamentals, but it should give you some pause before making short-term bets based on the US Macro surprise index. The Citi Surprise indicator tells the same story, but it also registers a strong positive surprise in Europe where sentiment isn’t particularly high right now.
Albert Edwards still optimistic about Japanese equities
Putting economic surprise aside, forward EPS has taken a sharp downward turn recently. Removing financials and the energy sector softens the drop but doesn’t eliminate it entirely. Albert Edwards doesn’t outright recommend looking for stocks in Japan, but he does mention that PE multiples have increased by 4x in both the US and Europe since the beginning of 2013, reaching 17x and 15x respectively, while Japanese stocks are still sitting at 13.5x.
“Japan is cheap and supported by profits growth. Enough said,” writes Albert Edwards.
Albert Edwards has been bullish on Japanese equities as part of his ice age thesis since at least this time last year (he doesn’t hate every asset class), and continues to believe that the West is going to get in a deflationary cycle like the one that Japan has been struggling with for decades.