Who are you gonna believe? Me or your lyin’ eyes?
You’ve probably heard that line. It’s often attributed to Groucho Marx, but actually spoken by his brother Chico in the 1933 comedy Duck Soup.
I thought of it this week because of the crazy divergence between how the markets are behaving and what the economic data is saying. In short, investors are being forced to ask whether the markets have it right … or if the data does.
Just think about it: Stocks have rallied in the last week. But they still suffered the worst start to a year ever. The spread between 2-year and 10-year Treasury yields just collapsed to the lowest since 2007, while the yield on the 5-year recently hit its lowest since the summer of 2013.
Junk bonds? Emerging market debt? Bank stocks? Leveraged loan prices? They’ve all bounced in the past week with stocks. But they remain near multi-year lows.
Then there’s gold. The yellow metal soared $200 an ounce off its lows in just the last couple of months. Gold-mining stocks had their biggest monthly rally since 1998. And both are holding on to the lion’s share of their gains. That suggests investors don’t want to let their “chaos insurance” go.
All of those are negative market and economic signals. They suggest the economy could be headed toward or into recession.
But the latest economic data hasn’t shown a huge deterioration yet. Some figures actually beat the relatively downbeat forecasts since the start of 2016.
Overall retail sales rose 0.2% in January, while a core reading used in calculating GDP gained 0.6%. Durable goods orders climbed 4.9% in January, bouncing back from December’s 4.6% plunge.
Construction spending rose a greater-than-expected 1.5% in January to the highest level since 2007, driven by public projects and non-residential activity. And the ADP Research Institute said that the U.S. economy added 214,000 jobs in February, topping the average forecast of 190,000.
|Are the markets too gloomy?|
So what gives? Are the markets too gloomy? Is the data telling the truth? My best read, frankly, is “no.”
The deterioration in credit markets is widespread, severe, and persistent. The tightening of bank lending standards is getting more intense. The inability of policymakers to pull in the same direction is a major risk factor, as is the fact that countries aren’t substituting fiscal action for untested and potentially dangerous monetary “fixes” like negative interest rates.
Even the economic figures have some hair on them, if you take the time to look beneath the surface. The ADP report showed manufacturing losing another 9,000 jobs, and the ISM manufacturing index held below 50 for the fifth month in a row in February. That’s the longest stretch of readings below that level, which marks the dividing line between expansion and contraction, since the tail end of the last recession.
Pending sales of existing homes just fell by the most in any month since December 2013. And even the supposedly strong February auto sales figure missed forecasts, with the seasonally adjusted annual sales rate coming in at 17.5 million vs. estimates around 17.8 million.
Manufacturers needed to offer much more “cash on the hood” to move the needle, too. TrueCar research found incentives rose 11% from a year earlier.
At Ford Motor (F) alone, they reportedly jumped $530 per vehicle on average from February 2015.
Bottom line? I still believe a major credit market and economic turn is underway. That doesn’t preclude shorter-term rallies. Some of them will be vicious as that’s the nature of volatile bear market-style environments. And it doesn’t mean you can’t find some diamond-in-the rough investments.
But it does continue to suggest — as I have since last summer — that you should be cautious with your investing strategies.
By the way, if you missed my recent webinar “Finding Profits as Markets Falter and Gold Soars,” don’t worry. I’ve arranged for the event to be posted on YouTube at this link. I think you’ll find it incredibly timely and valuable, given the fact gold prices just hit a one-year high and gold mining stocks just notched their best month since 1998!
As a reminder, the event also included noteworthy gold and market experts like Brien Lundin, Brent Cook, and Peter Schiff. So make sure you carve out a few minutes to view it online here.
Until next time,
P.S. The death of the American dream is coming. Nothing will ever be the same again for you or for your family. The America we know and love will be no more. The fallout of this historic event will be horrific for the unprepared. It will trigger all-out panic — first in the U.S. bond market … and later in the stock market. It will destroy millions of jobs … sentence most Americans to a “dark age” of depression and poverty … send gold and silver prices careening higher … and push the U.S. government to the brink of collapse. Click here to learn how to protect you and your family in the upcoming crisis!