Sometimes, figuring out where the markets are headed is a difficult, complex task. Sometimes, it all boils down to a simple question. I think we’re firmly in the latter situation right now. That question?
Is this a real economic rebound … or not? The answer will determine where virtually every asset on the planet heads next, and which U.S. stocks will outperform versus underperform in the remainder of this year.
Just look at what happened in the first half of 2016. "Slow growth/pre-recession" assets soared in value. Gold took off like a rocket. Treasury bonds surged in price, causing interest rates to plunge. The Japanese yen exploded in value, while the U.S. dollar sank against a broad basket of currencies.
Within the stock market, "Safe Yield" names vastly outperformed riskier equities. Utilities, telecoms, consumer staples and related sectors put up huge gains, even as the broad market went sideways and "growthier" sectors underperformed.
But that all began to change in July and early August. Suddenly, the new narrative became: "The economy is off to the races again!"
The chorus of bulls said: Look at the fantastic jobs figures we got for June and July, rather than the dismal numbers from the previous five months. Look at future GDP growth, rather than the lousy GDP we’ve had for three straight quarters. Look at future corporate earnings, rather than the abysmal, five-quarter stretch of negative numbers we just experienced. They all confirm that happy days are here again.
Sure enough, the stock market sectors that were outperforming began to underperform. Treasury bond prices started drifting lower, and so did gold. The dollar rallied off its lows, and market-based indicators of volatility like the VIX tanked.
That brings me to today, and that key question I posed at the outset: Is this a great economic turn for the better? Or is this just a flash in the pan, a bounce that’s doomed to peter out?
I’ve made no secret of the fact I believe we’re very late in the credit and economic cycles. Many of the world’s smartest fund managers and billionaire investors agree with me.
There is also ample evidence that lower and lower rates, and more and more QE, are doing less and less for the real economy. Plus, the collateral damage is getting progressively worse for banks, pension funds, insurers, and savers.
|I believe the U.S. dollar is likely to lose ground.|
As a result, I still believe that the greatest risk lies with economically sensitive stocks. I believe the U.S. dollar is likely to lose ground, and that bond yields could fall even further — regardless of what the June and July employment figures showed.
It’s worth pointing out that while Treasury yields spurted higher on the jobs news, they failed to breach significant technical resistance. The yield on the 30-year bond is continuing to chop around, up just 18 basis points or so from its all-time low from early July.
If I’m right, it would be bullish (again) for "Safe Yielders," gold, the Japanese yen, and other investments that dominated in the first half of 2016. It would also mean the market moves we saw in July and early August were just multi-week corrections … and that the longer-term trends I first identified and alerted you to more than a year ago are still in play.
A definitive answer shouldn’t be far off. The economic data we get in the next couple of weeks will tell the tale, as will the technical trading action in all of the assets and sectors I just identified. The lousy productivity news we just got a few days ago isn’t very encouraging though.
U.S. productivity — or how much output employees produce for each hour worked — tanked 0.5% in the second quarter. That was much worse than the 0.5% gain economists expected. It also dropped in the first quarter of 2016 and the fourth quarter of 2015. That three-quarter string of losses is the worst since 1979.
Why does that matter? Higher productivity allows the economy to grow faster and living standards to rise, while also keeping corporate profitability healthy. Lower productivity reduces living standards, puts pressure on corporate profits, and often leads to job cuts down the road.
Bottom line: We’ll know soon enough whether this rebound is a big trend change, or just noise. But I wouldn’t make any wholesale changes in your portfolio yet, based on the inconclusive and shorter-term evidence we’ve seen to date.
Until next time,
P.S. I will be hosting an event this coming Tuesday August, 16: Cracking the “T” Code. This code could make a HUGE difference for you in today’s chaotic times so please, register today.