As I happen to be traveling across the great deserts of the west in Utah and Arizona for our family spring break mountain bike trip, we found ourselves quite literally in the middle of nowhere with no cellular service. At a cross roads, we had to make a bit of a blind choice and one that could lead us for 100's of miles in the wrong direction before knowing any better. I was reminded that it's always good to have a solid understanding of the big picture (map) as we go through our journey to help us make good choices each day. Let's get out our investor's map.
Economy - Still Getting Weaker
For months, the gurus have pointed to weather related economic weakness, especially in the Northeast, caused by an unusually severe winter. Maybe that's real or maybe a bit of a cover. Either way, the US economy is getting weak enough that several important indicators could slip into negative territory (read recessionary status) in the coming months if they don't spark up soon. This includes everything from general business conditions, manufacturing and services, industrial production, on and on. Building permits across the country were very soft last week especially in the west and home prices seem to be losing momentum in more than a few markets. The bond market typically provides a great signal for rising recessionary pressure but I find it notable that even with the strong dollar tilting the flow of global cash toward toward the US, the bond market is NOT yet giving us the nod that recession looms. Everyone is optimistically holding their breath and hoping for some better reports but we'll let the road signs tells us where to go.
Cheap Gas - Not Going Into Spending
Looking at the spending map, we see now that cheap gas at the pump is not going into consumer spending - at all. In the last several quarters, they say that $112 Billion has been saved at the pump due to extremely low gas prices. Where did it go? Savings accounts just saw an increase of $129 Billion. Walmart and other typical recipients of low prices at the pump, are not getting the boost that everyone expected. Without the bump to consumption, the whole big bang theory of cheap oil and gas starts to look like energy sectors just becoming more of a drag on the economy. The rising US dollar is having the same negative impact on corporate earnings. As Stan Druckenmiller said in his Bloomberg interview this week, the US dollar is not done rising and the Euro is likely headed to 80, almost 20% lower than today. I never like to challenge Stan's convictions.
Markets - Still Thin and Unproductive
There are pockets of strength in the US markets but they are thin and only there for those willing to really root around the edges. Financials and technology are just barely hanging on to their uptrends and industrials are still under US dollar pressure. Healthcare and Energy are leading the year (yes energy) but that's about it. Small caps are better than mid caps which are better than large caps. As I have reported many times, the valuation of the US stock and bond markets suggests a 7-10 year average annual return of around 3% from these levels until we see a mighty correction of some sort that creates new value and opportunity. Set your expectations accordingly. Foreign markets are much more attractive on these basis with focus on Europe, Japan and China. It also looks like emerging markets in general want to run higher but I remain a bit skeptical. We're doing our best to focus client money in these pockets of strength both domestically and internationally. It seems like the market wants to favor things that we need outside of the consumer sector - think wireless carriers and insurance type sectors many of which pay healthy dividends. The market also wants growth and speculation - think solar and Netflix. The market doesn't want anything in the middle - think domestic indexes, consumer staples and Utilities. The main road is bumpy and unappealing, seek the alternative route!
Seasonal Travel Advisory
Just ahead we have the dreaded month of May which has that giant question mark of whether we should just sell in May and go away. April is typically a great month for stocks, one of the best. But this year, investors just don't seem to be in the mood to bid up prices with all the current and future unknowns. Seasonal strength which runs from October until May is coming to a close. But remember, seasonality is a blunt trading tool and not something we ever act on by itself. It is just one of the many road signs we observe.
Looking at the whole map, I still see a tough road ahead. But a tough road does not make it impassable. There are still pockets of strength, enough to keep our portfolios largely invested and diversified. We still have some leadership and some very attractive sector opportunities developing like those in energy and commodities. It does feel terminal and certainly investors sentiment concurs (bearish). But fear is part of investing and we accept it when it comes without making an emotional decision against our system. More often than I care to admit, it is from these moments, when the whole system seems to be backing over the cliff, that it regains strength and surges out to another all time new high. Let's not forget one important fact. The primary trend of the global equity markets is still up and our portfolios should work to remain engaged for as long as that condition prevails.
Have a great week