Does anyone feel the need to take a vacation? 2018 will go down in history as one of the most volatile in stock market history and we’re not even through the first quarter. Dramamine could easily replace the No Doze traders needed to keep their eyes open last year. Is this a case of being wary of what you wish for?
Check out our H2 hedge fund letters here.
At the core of the unrest are the dueling forces of central banks’ various forms of tightening – rate hikes, tapers of intended (ECB) and unintended (Bank of Japan) varieties and, of course, quantitative tightening – and a near anarchy state in an Administration that seems hell-bent on starting a trade war with China.
Meanwhile, back at Uncle Sam’s ranch, the country’s borrowing costs are on the rise as the deficit hits the highest level since 2012. As Peter Boockvar observed, February’s interest expense of $23.3 billion was up 10% on year-ago levels. Interest expense now sucks up 6.3% of spending vs. 5.8% in the prior year.
Even as interest rates and expenses rise for all borrowers, signs are multiplying that the economy is slowing. Retail sales appear intent on maintaining their disappointing streak. To put the most recent figures into perspective, nominal core sales, which net out autos, gasoline and building materials, totaled $268.8 billion in November and $268.2 in February. In other words, they’ve gone nowhere.
As a follow-up to my recent analysis of the car industry, auto sales have fallen for four months running. The continuing clampdown in credit availability should send this sector back into recession, where it last was in September before Mother Nature interceded to give sales a boost.
The Atlanta Fed tracks the data as close as any economist in endeavoring to maintain a real-time GDP forecast. As recently as February, it appeared that growth in the first quarter would clock in at an amazing 5% pace. Yes, the February to which Atlanta refers is one in the same with last month. In the ‘how quickly things can change’ department, after factoring in today’s retail sales report, Q1 GDP looks to come in at a mere 1.9% rate, smack dab in the middle of the middling range it’s been in for the past decade.
What could turn the tide? We’re told that tax refund mailings have been delayed and that the fruits of the tax cuts will be bounteous in future consumption figures. Wage gains, which truly are building despite the consensus’ incorrect take on last Friday’s jobs report (the last time it took so little time to find a job was May 2009), should also manifest in increased spending. The only thing to say to this optimism is, “We’ll see.”
As for upside surprises, to study the markets implies that the outcome of the Italian elections was benign. The first majority vote for non-establishment parties in modern times suggests the situation is fluid, to be polite. The yield on 10-year Italian sovereigns is 2%. Ergo, all must be well in the land of my ancestors. Right?
Truth be told, I’ve painted a picture of confusion on purpose. The murky outlook coupled with nausea-inducing market volatility make economic fortune telling the most difficult of tasks.
The best I can offer is that we should be looking pretty good, as in fit. Take a drive and you can’t help but bump into a fitness, spin, barre, yoga or Pilates studio. Whatever happened to going to the gym? My point is, leading indicators come in many forms. But what do they actually say about what’s to come?
Finding reliable guideposts, true leading indicators, at what appear to be economic inflection points separates the men from the boys, or women from the girls, if we must be PC. This week I’ve taken up that very challenge. I invite you to enjoy this week’s installment, DIVINE INTROSPECTION — Crafting the Clearest Crystal Ball.
Hoping you’re spinning your way to your cardio best and wishing you well.