Even before the weak May employment report came out early this month to throw “cold water” on the strong growth narrative, evidence had continued to mount that quasi-recessionary conditions remained stubbornly in place. That report, with its downward revisions to data from prior periods, made clear that job growth over the last three months was closer to 100k than the over 200k pace that had been just about the only support out there for the case that the economy was fine. On that front, Barron’s mentioned that:
“While the markets were viewing the employment numbers with relative equanimity, David Rosenberg, chief strategist and economist at Gluskin Sheff, points out that May’s 38,000 drop in goods-producing payrolls was the steepest since February 2010. This critically sensitive sector contracted for the fourth consecutive month, by some 77,000 positions, or 1.2%. ‘This is precisely the sort of rundown we saw in November 1969, May 1974, October 1989, November 2000, and May 2007’—each presaging a recession by an average of five months, he commented.”
Precisely the sort indeed.
It still seems that many investment luminaries like Soros, Gross, and Icahn, as well as numerous major sell-side shops like Goldman Sachs are taking turns trying to outdo each other in discussing how the central planners have failed us or caused various risky market distortions. We can put our “tin foil hats” back in our desk drawers, for now, we guess. From a contrarian’s perspective, we suspect these persistent public displays of bearishness may lend some support to equities for a while longer because they are so widespread and coincide with a virtual buyer’s strike from traditional investors who seem fed up with the Fed and its effect on markets. This does not change our views, which remain dependent on valuations. Besides, various measures of sentiment like volatility suggest complacency.
The ECB’s foray into corporate bond buying to combat a still struggling European economy has added impetus to the collapse in global yields, but underlying slow global growth remains the major driving force for these moves in rates. At the same time, negative-rate policies in Europe and Japan are proving highly disruptive to banking and insurance companies and elected officials in those places are starting to worry more vocally that the central bankers have gone way too far. Isn’t it quite telling that a policy designed to increase lending is crushing the very profitability of financial intermediaries who are clamoring for less monetary intervention? We continue to think it is just a matter of time before the political tide turns more harshly against central bank meddling of all types.
At the same time, this month’s vote on the U.K.’s continued membership in the EU, in which the “leave” side appears to have the lead for now, is just the latest example of how the elites are losing their grip on a frustrated populace. We remain cautiously positioned. The vote in the U.K. later in the month could move markets in either direction for a while, depending on the outcome, but that one event is not a driver of our positioning at all. The current flatness of the treasury curve and the strength in bond prices conveys very little doubt that future growth prospects are not exciting and that the forecasted jump in corporate profits for later in 2016 seems misguided to say the least.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.