For a second consecutive week, US equities wobbled but concluded on the right side (positive of course) of the ledger with the S&P500 adding +0.2% amid what many investors and the financial media continue to highlight as mixed signals. Bears are saying the decline in bond yields and plunge in oil prices are screaming recession. And, the Citi surprise index has plunged while contending at the same time a lack of inflation means lack of demand. They also argue the Fed is tightening too aggressively and too early in light of these less than robust data points indicate is necessary. Meantime, Bulls are saying goldilocks conditions, not-too-hot and not-too-cold growth and low inflation, continue to pave the way for steady economic expansion. They cite leading indicators continue to increase and unemployment claims remain low; house prices are rising and corporate earnings are poised to continue the 1Q experience of general outperformance relative to both expectations and the year-ago period.
Stepping back from the commentary, the data last week indeed remains a mixed bag. The US yield curve continued to flatten last week while company surveys report a steady and optimistic tone from businesses; oil continued to move lower (and broke the threshold for a technical bear market) but copper and iron ore began to improve. Corporate spreads remain steady (suggesting credit risk is not rising meaningfully as it did last year during the oil selloff), but economic data from China was mixed. US retail continues to be a tale of two extremes as Amazon continues to prosper and innovate while more traditional outlets suffer and try to play defense. More short-term positive was that US housing activity seems to be improved following the weak reading that captured attention last month. And on the US policy front there remains at least the appearance that Congress is still attempting to move its agenda of healthcare and tax reform forward despite the expectation by many that a toxic Trump presidency will torpedo any actual progress on hoped-for pro-growth fiscal policy (this was observed through the outperformance of the healthcare sector last week). Another positive was a report that US banks are in very strong and healthy shape following release of recent stress test results.
At the end of the day, what remains most clear is that the days of easy US monetary policy are ending and the market seems to retain at least some hope (even amid rising skepticism) that fiscal policy can successfully pick up the baton. Additionally, while the US economic and financial market cycle is now among the longest in history (it was 10 years ago in June that the US housing crisis began to unfold and morph into a full-blown global financial crisis lasting through Spring 2009), economic conditions and animal spirit sentiment outside the US and particularly in Europe are earlier in their recovery phase. This improvement abroad provides a tailwind in an ever more globalized economy and investors are viewing the recent crash in oil prices as an issue of oversupply rather than one of weakening demand. Bottom line: for the moment we believe the bulls continue to retain the upper hand in this goldilocks story; the bears have not yet began to head for home and recession risk still seems all but imminent. Still, investors must acknowledge that a market pause or more meaningful pullback seems well overdue in the short-term following complete hiatus since the beginning of 2017. Complacency born by persistent low volatility is a recipe for short-term surprise should unexpectedly weak data present itself.
Enjoy the upcoming 4th of July holiday and be on the watch for our latest quarterly newsletter to come in the first part of July.