Turn Signals
2166 words – a 5 minute read ( its worth it!)
As regular readers know we have been driving down the investment highway following our “Middle Path” directions for roughly a year. The Middle Path calls for a high nominal growth world that drives between high inflation and deep recession – the two main economic fears of the past year or more.
More recently we have highlighted the huge positive policy changes occurring throughout our Tri Polar World, policy changes that are being obscured by a Curtain of Fear, Uncertainty & Doubt – the famous FUD. Pulling back the curtain from SVB related (today read First Republic) systemic bank woes & credit crunch FUD, reveals the unfolding of such key issues as main DM Central Banks accepting a slightly higher inflation target, the rollout of US Industrial Policy for the first time in 70 years, Europe’s deepening integration across energy, defense & climate, Japan’s incipient move off YCC and China’s drive to realign its economic path more towards domestic demand rather than FAI or exports.
Last week we wrote “Crunch Time” noting how many issues across policy, the economy & markets are coming to a head: the end of the Fed rate tightening cycle, the likely end of the S&P’s long trading range, the battle between US equity sell side analysts who are raising estimates for 2H 23 and into 2024 vs the fixed income community who are calling for recession and significant rate cuts by YE.
Today, we want to highlight some turn signals we have noticed in our recent reading, signals we believe are pointing to a global economy that is picking up speed not slowing into global recession. Regional economies underpin that acceleration, led by Asia but now including Europe and a US that continues to suggest recession – either of the economic or earnings variety - is unlikely.
The same holds true for turn signals we see emanating from the corporate world & here viewed mainly through both an earnings & real business activity lenses. We have also picked up some turn signals from the market internals be they sentiment or technical in nature that we think are worth noting. We believe employing a wide funnel makes sense when an investment guru like Stan Druckenmiller says “it’s the most uncertain investment environment in my 40 + year career”.
So much as we do in our Monthly when we typically have 20-25 charts from 15-20 different sources, here we have also cast a wide net. We tried to keep it to a baker’s dozen but cut it off at 20 – note sources at end. We also added a bonus clip.
In no particular order:
1. U.S. and European business activity rose in April at the fastest pace in about a year, in a boost for the global economy. Demand for services drove the growth, according to surveys by data firm S&P Global covering U.S., eurozone and U.K. businesses. April US PMIs all BTE - U.S. Apr. S&P Global Manufacturing PMI: 50.4, [Est. 49.0, Prev. 49.2]. U.S. Apr. S&P Global Composite PMI: 53.5, [Est. 52.8, Prev. 52.3] U.S. Apr. S&P Global Services PMI: 53.7, [Est. 51.5, Prev. 52.6]. ISM to follow - tend to move in same direction...“The April flash #PMI showed unexpected and broad-based improvement.. suggesting further positive momentum in the US economy .. a more sustained pace of expansion .. tighter monetary and credit conditions do not appear to be significantly slowing activity at this time.” Composite PMIs rising - US bottomed in Dec at 45 - April 53...JPM.
2. Demand is recovering, according to the port of Los Angeles Signal data, which shows that in week 18, covering 30 April to 6 May, 21 ships are due to arrive at LA terminals with total manifested cargo of 109,965 teu, a 12% increase on the same week of last year. Container spot rates from Asia to the US west coast shot up this week, as carriers succeeded in implementing a good percentage of their mid-month GRIs. The average cost to ship a 40-foot container from Shanghai to Los Angeles the week ending April 20, was $1856, up 10.9% from the week before, the first increase in the component of the Drewry World Container Index in 12 weeks. Lodestar
3. China’s property developers are finally receiving more financing, after a government crackdown starved them of funding for much of the past two years. Tencent, Alibaba, Meituan, and Kuaishou all beat analyst estimates in their fourth quarter results. Gavekal & Krane
4. Oxford Econ proprietary LEI suggests near term recovery in global manuf PMIs. Oxford
5. Lots of discussion around the y/y decline in M2, so here's a competing thought: The @NDR_Research Real Monetary, Fiscal and Exchange Rate Policy Index shows policy easing, after spending much of 2022 in tightening camp. NDR
6. It is SUPER RARE to go past 300 days in a $SPX decline. You have to talk about the worst all time selloffs. Are we in a "Worst all time" economy? If Oct low was not THE low then we are in one of longest bears in history - 6th longest in last 70 yrs. Strategas
7. Homebuilding stocks have been rallying sharply. As our figure shows, it is likely that residential investment turns up in the coming quarters ("price leads data"). Something worth noting since residential investment sliced GDP growth by 1.3ppt in H2 2022. The only time we’ve ever gone into recession while housing was a positive contributor to growth was 2001. As I’ve said, I think the tech job cuts are behind us, so not sure what else is big enough to matter. RenMac – Conor Sen
8. US economic activity was below trend in March via the Chicago Fed Nat'l Activity Index, but recession risk remains low. In fact, the 3mo avg continued to edge higher to +0.07, far above the -0.7 mark that signals recession. Chicago Fed
9. The German government raised its forecast for 2023 output for a second time and said Europe’s biggest economy will expand by twice as much this year as previously expected. While the anticipated 0.4% increase in gross domestic product would still be relatively weak, experts in the economy ministry in Berlin were projecting a contraction of the same magnitude as recently as October and in January predicted expansion of 0.2%. Next year, the government expects growth to accelerate to 1.6%, Habeck added, which represents a small downward revision of his ministry’s January forecast of 1.8%. The euro set a new 12-month high yesterday, just shy of $1.11. BBG
10. The sell in May period is right around the corner. Did you know that stocks have gained in May nine of the past 10 years? Sell in June? Carson
11. Homebuilders hitting new ATHs!!! Shares of PulteGroup just hit an all-time high. Twitter
12. Perhaps surprisingly, positive earnings revisions for 2023 have been going up (analyst estimates based on forward estimate for current fiscal year). Certainly could be considered constructive for the time being. Source: @NDR_Research
13. CNBC - CNBC’s latest All-America Survey had some interesting results: 69% of the public was negative on the US economy, both now and the future. That was the most pessimism in the survey’s 17-year history. 24% said now is a good time to invest in stocks, the lowest reading in the survey’s history. CNBC
14. Of all the Chinese companies reporting first-quarter results, 90% have given positive profit guidance so far, up from the historical average of about 60% to 70%, Sunil Koul, the bank’s Asia Pacific equity strategist, said on Bloomberg TV Wednesday. Most of the companies may deliver 20% earnings growth, he added. The encouraging earnings picture is offering investors hope after geopolitical tensions triggered a $446 billion meltdown in domestically traded Chinese stocks this month, pushing the MSCI China Index toward its worst April since 2004. GS
15. US: 81% of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is flat on a yoy basis, surprising positively by 6%. At a sector level, delivery is mixed, with 5 of 11 sectors printing positive EPS growth. Topline growth is coming in a+5% y/y, surprisingly positively by 2%. Europe: Of the Stoxx600 companies that have reported so far, 74% beat EPS estimates. Q1 EPS growth is coming in at +4% y/y, surprising positively by 11%. In Europe too, earnings delivery has been fairly mixed across sectors. Revenue growth is at +7% y/y, surprising positively by 3%. Japan: 56% of Topix companies beat EPS estimates, with overall EPS growth at +18% y/y. Top-line growth is running at +12% y/y this quarter, and 49% of companies have beaten revenue estimates. % of EuroStoxx 600 beating Q estimates is highest since pre GFC! JPM
16. Keep an eye on this: non-US earnings are now seeing a cyclical recovery, while US earnings keep declining. Updating the @NDR_Research chart showing that earnings tend to continue lower even after the market has bottomed. Historically, equities have bottomed before earnings, the economy, and well before most investors get back to a fully invested allocation. Fidelity
17. To paraphrase the economist Robert Solow, the downturn has been everywhere but in the economic statistics. Solid corporate profits, low unemployment, and yesterday's sturdy GDP data suggest the U.S. economy is more or less fine. Sure, it's slowed down — which is necessary to lower inflation. But there's scant evidence the economy is wobbling on the cliff's edge. Real disposable income was up 8% during the quarter — the best gain in a decade aside from when it was juiced by government payouts during the COVID crisis. That helped drive consumer spending up 3.7%, the fastest since 2021.In the corporate world, analysts have started raising their earnings forecasts for the coming year. The bottom line: For sure, there are weak spots, like the housing market. And things could change if the actual impact of the last year of rate hikes still hasn't fully registered. But in an economy that's 70% consumption, the current strength of the consumer is tough to square with the idea of a looming downturn. Axios
18. Market Speed - $SPX began pricing in Fed policy and Economic cycle earlier than usual. Bear markets start median of 7 months AFTER 1st rate hike. This bear market began 2.3 months BEFORE 1st hike. This is fastest macro-market cycle in history. Finom Group
19. The month-over-month pace of US rent growth was 0.5% in March; a drop from the second half of 2022 when the monthly numbers were hovering at 0.8%.That could signal further drops to come. "The rollover in rents is finally underway," wrote Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, in a note. The monthly data is a bright spot for rent prices because the annual number is still coming in hot — with rents up nearly 9% in March compared to last year, it was the highest number since 1981.The big picture: The shelter component of CPI comprises 40% of the index overall, and is a big reason inflation remains stubbornly high. “The index for shelter was by far the largest contributor to the monthly all items increase," the Labor Department emphasized in its news release. WSJ
20.According to the latest Bloomberg Intelligence/Truckstop survey, we may be sitting at the lows for US spot truckload demand and rates. Demand expectations for the next three to six months have improved and the rate outlook is inching up. “While we don't believe we're out of the woods yet, the shift in sentiment is encouraging,” BI senior logistics analyst Lee Klaskow writes in the report. “Conditions should improve due to seasonal trends, coupled with higher-cost capacity being forced out of the market. Rates may get additional support as inventory levels return to more normal levels. “Some highlights from the survey:60% expect volumes to rise over the next three to six months — about 20 percentage points higher than the fourth-quarter 2022 poll. “We believe spot rates will start showing improvement as early as the second quarter as the market rebalances, supporting firmer contract rates in” the second half of 2023, he says. BBG
We will leave it there and note we plan to do a deep dive into many of these issues in next week’s Monthly. For now though the weight of evidence points us towards an accelerating global economy with earnings growth beating (lowered) expectations but more importantly forward revisions picking up not down. We continue to think the bears are running out of time and expect the Fed’s May meeting to catalyze an S&P move UP and out of its long trading range. We continue to see Fed pause = USD weakness = ROW outperformance.
We got into some of these points in what FinTwit is calling: “2023’s Ultimate Bull Bear Debate” with good buddy Chase Taylor of Pinecone Macro under the auspices of mutual friend Kevin Muir of Market Huddle. A solid 30 minutes of bull (me) debating bear (Chase). https://www.youtube.com/watch?v=gGxunIir2MI Enjoy.