The action beneath the veneer
What S&P 500 highs are telling investors
My good friend and fishing pal, David Kotok, co-founder of Cumberland Advisors, had this to say in a Bloomberg News interview on Friday: “We’re a little more defensive. We would like to see the optimistic outcomes, but we think the risk profile of the world is changing.”
Kotok typically is a huge optimist, though never one to allow his emotions to dictate his investment thesis or positioning. That he said what he said carries much more weight because, as I said, he invariably conveys a positive message (and, let’s face it, optimists do tend to win out most of the time).
It’s not just the data. Look at what the action beneath the veneer of a record-high S&P 500 is telling you, which is always contained in “ratio” or “relative strength” indicators. That is where the really valuable information resides.
❚ The 2/10 yield curve (the spread between the two- and 10-year yields) peaked at 159 basis points on March 29 and has now flattened to 114 basis points.
❚ The stock/bond total return ratio peaked on April 29 and is down seven per cent since that time.
❚ The transport/utilities index peaked on June 1 and is down six per cent.
❚ The S&P 500 value/growth RSI peaked on March 8 and this ratio has fallen 12 per cent since.
❚ The silver/gold ratio peaked on Feb. 25 and is down 12.5 per cent. Similarly, the copper/gold ratio peaked on April 27 and is down 10 per cent.
❚ The Australian dollar/ Swiss franc cross rate peaked on March 18 and is down 4.5 per cent.
This is what the back end of the Treasury market sees. Both the incoming data and the validation from other asset classes. And I should tack on that it’s not just about the pandemic not going away: it’s also about reduced expectations for future stimulus. Not even the Democrats in the United States can agree among themselves as to how the hoped-for infrastructure package will be structured and funded. And in the current Barron’s, there is a nifty reference to a stock market index sensitive to the infrastructure file, and it is down eight per cent in just the past month (the S&P 500 is up two per cent) and fell three per cent last week (in an overall flat market with all that volatility).
We have the variant. We have the reduced growth forecasts. We have the lack of clarity on future fiscal stimulus. The economic conditions have weakened so much in China — tacking on the other policy steps to clamp down on Big Tech and to kibosh the commodity surge — that the People’s Bank of China is now compelled to start easing up, at the margin, on credit policy. The second-biggest economy in the world is now seeing disinflation, or even deflation, in its latest price data, and all the media in the U.S. remain hyped over inflation as if the country operates in a vacuum and is isolated from these shifting global winds.
There is nothing permanent in the inflation data despite what the nattering nabobs on bubblevision, bereft of any real analysis, have to say on the matter. I continue to wait fruitlessly for someone or something to convince me to change direction … it’s rather disappointing.
Meanwhile, it is interesting to see that the S&P 500 household durable goods stock composite has sagged nearly nine per cent from the nearby highs even as cyclical services have gone to new highs. From a Treasury market perspective, this is important since the former represents a Us$2.4-trillion chunk of GDP, or four times the size of the latter. And within the “reopening” subsectors, only retailing and restaurants are behaving well, while office real estate investment trusts, airlines, hotels and casinos have rolled over considerably.