Stock Markets Have Stalled Since March – Now What? by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 16, 2015
IN THIS ISSUE:
- Are Stocks Poised For a Significant Selloff?
- Say Goodbye to Dow 18,000… for a While
- Thoughts on the Fed’s First Rate Hike – “Liftoff”
- World Bank Cuts 2015 Global Growth Forecast
- Time to Consider Our “ALPHA ADVANTAGE” Strategy
Are Stocks Poised For a Significant Selloff?
I get asked fairly frequently what I think about the stock markets and specifically, whether I believe this unprecedented bull market can continue. My typical answer is, I don’t have a clue. I don’t understand how a country that has increased its national debt from $10.6 trillion in January 2009 (when President Obama took office) to over $18 trillion in January of this year could see its major stock markets more than double during the same period.
It is widely accepted that the Fed’s massive “quantitative easing” (QE) program – whereby it purchased over $3.5 trillion in US Treasuries and mortgage-backed securities since 2008 – and its zero interest rate policy (ZIRP) – helped drive investors and others into riskier assets (ie – stocks). This greatly increased demand naturally drove stocks higher, wildly higher, despite the unprecedented explosion in the national debt.
When the Fed ended its controversial bond buying program in October of last year, many of us wondered if that might mean the end of the bull market in equities. However, the Fed continued with ZIRP, and stocks continued to move higher to a new all-time record of 18,288.6 on March 2. The market then sold off sharply to well below 18,000 and went sideways during the rest of March and April.
In early May, another rally followed taking the Dow back above 18,000 and this time it reached another new high of 18,312.4. Investors breathed a sigh of relief. But, alas, the market sold off sharply once again falling well below 18,000 (17,791 as of the close yesterday). So now investors are worried that there may be significant overhead resistance. They may be correct to worry, especially if all their equity exposure is in buy-and-hold strategies.
Over the weekend, I read a very good report on the stock market by Anthony Mirhaydari in The Fiscal Times, a popular digital news, analysis and opinion publication. Mr. Mirhaydari, a seasoned stock market analyst and writer makes, some very interesting observations that I think you may find noteworthy. Here is his latest report in its entirety:
Say Goodbye to Dow 18,000…for a While
by Anthony Mirhaydari, The Fiscal Times
I’m just going to say it: The stock market is downright boring right now.
The Dow Jones Industrial Average has again fallen below 18,000, a level it first tested in December. That’s six months of no progress.
I can’t say I’m surprised, after I warned investors in a column on Christmas Eve that the bulls had overdone it. The other big dynamic at the time was the end of the Federal Reserve’s bond-buying stimulus. The end of prior iterations in 2010 and 2011 were followed by sharp market selloffs, as shown in the first chart below.
This time, stocks have simply stayed in stasis: The S&P 500 hasn’t suffered a correction of 10 percent or more since early 2012. But that looks set to end very soon.
On the surface, the market seems to be waiting for a resolution on two big unknowns. The first is the fate of Greek bailout negotiations, as Athens is potentially set to default on a batch of debt repayments to the International Monetary Fund totaling $1.8 billion if no deal is done before the end of the month. Stocks posted their best one-day gain in a month on Wednesday on reports Germany would be open to a piecemeal compromise deal. Stocks then trimmed gains on Thursday on reports the IMF had pulled its negotiating team due to a lack of progress. A deal remains a long way off.
The other big dynamic is the timing and pace of possible short-term interest rate hikes from the Federal Reserve this year, which would be the first policy tightening since 2006. We’ll know more when the Fed concludes its next two-day policy meeting on June 17, but with job growth steady, inflation still low but stabilizing and retail sales rebounding, a September or even a July rate hike is coming into focus.
A negative outcome on one or both of these dynamics would likely shock stocks out of their three-year-long tranquility. My guess is that with Fed policymakers already more hawkish than the market in their interest rate hike expectations, based on their “dot plot” projections, it will be a Fed hike that rattles sentiment.
Whatever the trigger, market insiders are already feeling nervous; reflecting fragility below the surface that the Dow’s steadfast adherence to the 18,000 level belies.
A technical analysis pattern called a Hindenburg Omen was triggered Thursday thanks to divergences between price, new highs, new lows and advancing and declining measures of market internals. Just look at the way the percentage of NYSE stocks above their 50-day moving average has been rolling over since late May, as shown in the chart above.
While not a perfect signal (admittedly, there is no such thing in technical analysis) Hindenburg Omens have in the past been somewhat reliable warnings of approaching market weakness since they reflect a withdrawal of broad buying interest. (Admittedly, they have appeared numerous times in recent years without being followed by massive selloffs.)
Another way to think of this is that as breadth weakens, the market is relying on fewer and fewer stocks to stay aloft. One such stock is Apple (AAPL), to which the overall market is currently tracking to a historic degree (a concept known as statistical correlation). In layman’s terms: This is like a magician’s trick, distracting you with one hand — Apple — while preparing a surprise with the other (the rollover of a growing percentage of less closely followed stocks).
Also, while everyone is focused on headlines out of Greece or on every economic data point for its impact on Fed policy, the fundamental justification for Dow 18,000 continues to deteriorate.
So-called Dow Theory is flashing a big fat warning signal, as the Dow Jones Industrial Average stands near record highs while transportation and utility stocks have slumped. All three peaked in unison at the end of 2014 but have been diverging since. Transports are down 9.1 percent from their high. Utilities are down more than 14 percent.
Finally, a combination of still-low energy prices, a tightening job market, rising labor costs and tepid GDP growth continues to weigh on corporate revenue growth. Given the surge of corporate borrowing and the additional leverage on balance sheets (funding debt-fueled share buybacks and dividends), this is a problem since companies have increased their “gearing” or how sensitive net earnings are to changes in revenue growth.
The chart above shows how business sales are falling at a 2.3 percent annual rate, suggesting downside ahead for S&P 500 revenues. This pace of decline has been associated with the start of the last two recessions. Not even the 1998 mid-cycle slowdown featured a pullback of this magnitude. The drags from both lower energy prices (as I explained in a recent column) and from a tighter job market are set to continue.
Over the next four weeks, we’re going to get resolutions on Greece, clarity on the Fed’s rate hike timing, and begin the second-quarter earnings-reporting season. Based on market breadth and Dow Theory, stocks should move lower in response.
Me again. As Mirhaydari points out, the markets are anxious over Greece, which has somehow snagged a new debt deal at each deadline to avoid a crisis. Maybe the same will happen this time, but maybe not. What I read over the weekend said the IMF negotiators went home frustrated last Friday, nowhere close to a deal.
Obviously, the Dow and the S&P (and even the NASDAQ recently) have proven countless analysts wrong, and the same may happen again this time. But then again, maybe not as Mirhaydari suggests above. We’ll see.
Thoughts on the Fed’s First Rate Hike – “Liftoff”
As for the Fed, I continue to believe the first rate hike – liftoff – won’t come until the September 16-17 FOMC meeting. I don’t think it will happen at this week’s meeting which will conclude tomorrow, based on the most recent minutes from the FOMC’s April meeting. We will almost certainly get more clues as to timing during Chair Yellen’s press conference tomorrow afternoon.
I also don’t believe the Fed will vote to hike rates at the July 28-29 FOMC meeting, primarily because there will not be a press conference with Ms. Yellen after that meeting. Her next press conference after tomorrow is scheduled on September 17.
There is growing pressure on the Fed to “do something” this year from a host of former Fed officials and others. Several argue that the Fed is losing credibility by postponing liftoff when a growing number of FOMC members are in favor of it.
There was an interesting twist in the minutes from the April 28-29 FOMC meeting, which were released on May 20. One or more Committee members floated the idea of announcing the rate hike at one meeting but not actually implementing it until the next meeting.
Clearly, the Fed is worried about a significant selloff in the stock markets after the announcement. By announcing liftoff at one meeting but not actually raising the Fed Funds rate until the next meeting would give investors a month or so to contemplate it and hopefully conclude something like this:
Okay, we knew it was coming; now we know when. And it’s only going to be 25 bips (0.25%). That shouldn’t be too bad for the market. I won’t sell after all.
Obviously, we won’t know if this idea has gained any traction until the minutes of this week’s meeting are released around the middle of July. It will be interesting to see if any reporters ask Ms. Yellen this question tomorrow in the press conference. In any event, I’ll keep you posted.
Speaking of keeping you posted, I want to encourage those of you have not done so to subscribe to my weekly Blog which is usually posted on Thursday afternoons. I cover a wide range of topics aside from those I tackle in the E-Letter. The Blog is free and we never share your e-mail address with anyone. CLICK HERE to subscribe and join the conversation.
World Bank Cuts 2015 Global Growth Forecast
The World Bank downgraded its outlook for global economic growth this year amid a broad-based slowdown in emerging markets and softer output in the US. The Bank on Wednesday said that it now expects the world economy to grow by 2.8% in 2015, down from 3.0% that it estimated in January.
“Global growth has yet again disappointed,” said World Bank Chief Economist Kaushik Basu. Fortunately, the Bank maintained its previous estimates for global growth in 2016 and 2017 at 3.3% and 3.2%, respectively.
Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies, are offsetting healthier growth in Europe (more on this below), the Bank said in its semi-annual Global Economic Prospects report.
A host of challenges are weighing on growth in many of the world’s largest emerging-market economies, countries that helped drive the global recovery in the wake of the financial crisis. “There is a structural slowdown underway,” said Ayhan Kose, the lead author of the report. “Increasingly, they have difficult growth prospects going forward.”
Many of those economies are reaching the limits of their capacity to grow without major policy overhauls that would open up markets, improve the business environment and increase productivity. Trillions of dollars are needed to expand the arteries of economic growth: roads, railways, ports and other infrastructure.
Although the US economy is now gathering steam, a brutal winter sapped output in the 1Q and prompted the World Bank to downgrade prospects for GDP this year by 0.5 percentage point to 2.7%. It also downgraded its 2016 forecast for the US to 2.8%, down from 3.0% in January.
China, the world’s #2 economy and a primary export market for much of the world, is slowing after two decades of breakneck growth, at a faster clip than expected. Commodity prices have plunged in the past year amid anemic consumption and resource oversupply in China.
The good news in the otherwise disappointing report was the fact that the Bank raised its 2015 growth forecasts for Europe. The Bank now believes it is more likely that the Eurozone will avoid a recession in 2015.
Finally, the World Bank joined the IMF in calling on the Federal Reserve to hold off on raising interest rates until sometime next year. You have to wonder what Fed Chair Janet Yellen thinks about these international groups trying to influence US monetary policy.
Time to Consider Our “ALPHA ADVANTAGE” Strategy
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Wishing you profits even if the market goes down,
Gary D. Halbert