CHARTS THAT MATTER
As the old saying goes, a picture is often worth a thousand words. Charts are no exception and often encapsulate a powerful story.
Legacy’s Investment Team flips through hundreds of charts each quarter, handpicking those that we feel are relevant to the particular investment backdrop that you can walk through with us.
Consumer items have largely been spared by tariffs thus far into the trade war. Should the U.S. proceed with imposing tariffs on an additional $300 billion, there will be few items spared as illustrated in the change from current percentage of imports subjected to tariffs on the left to the percentages on the right under the proposed increase in tariffs.
University of Michigan’s Survey of Consumers for June showed that survey respondents voiced concerns over tariffs, which may negatively impact growth and inflation. The 5-10 year inflation estimate from the survey declined to 2.2%, the lowest on record.
The Conference Board’s Leading Economic Index (LEI) level increased to a new cycle high through April. However, annualized growth in the index slowed to 2.7% - the weakest growth rate since 2017. A further slowdown in the rate of improvement bears watching.
Trade tensions between U.S. and China have been renewed as the U.S. increased tariffs to 25%, from the previous rate of 10%, on $250 billion of Chinese imports last Friday. Tech-related imports are facing the largest impact from the increased tariffs.
Economic growth in the U.S. – as measured by Gross Domestic Product (GDP) – beat estimates by a wide margin in the 1st quarter as the economy expanded at an annualized pace of 3.2% for the quarter versus the 2.3% Bloomberg consensus estimate. Contributions to growth were experienced across each major category of GDP.
Analysts became extremely pessimistic on their outlook for earnings growth in the midst of the 2018 market selloff; with downward revisions to their earnings growth estimates throughout the fourth quarter. With a majority of companies exceeding estimates for first quarter earnings across the globe, analyst are now revising their pessimism and therefore earnings outlook.
China led a rebound in manufacturing activity across Asia during March. The IHS Markit manufacturing purchasing managers’ index rebounded to 50.5 from 49.2 for China – the largest increase since 2012. Levels above 50 indicate expansion. Additional evidence is needed to confirm whether or not the economies across Asia are stabilizing.
Fourth quarter GDP growth was revised down from the initial 2.6% estimate to 2.2% as government and consumer spending were less than originally estimated. This final estimate for the fourth quarter brings economic growth for the full year of 2018 to 3%; the fastest pace since 2005.
On March 22nd, the yield on the U.S. 10-year Treasury note dipped below the yield on the three-month paper. While an inverted yield curve often precedes a recession, not all inverted yield curves lead to a recession. Furthermore, while it may be a recessionary signal, it tells us nothing about the timing of such recession. See Legacy’s Insight Piece, “Inversion of the U.S. Bond Yield Curve” for additional commentary.
In February, Fed Chair Jerome Powell reiterated the case for a patient interest-rate policy given “muted” inflation pressures and slowing global growth as a risk to their outlook. The market now expects zero hikes in 2019 relative to the Fed’s projection of two hikes in 2019.
U.S. and European differences over agriculture threaten to rekindle a tit-for-tat trade war as Congress and some Trump administration officials are demanding access to European markets following a trans-Atlantic trade truce in July.
Job openings increased to a record high of 7.335 million during the month of December and exceed the total number of unemployed persons (6.294 million) by more than 1 million positions.
For the first time since 2008, for the first time since early 2008, the three-month Treasury bill has a higher yield than the market’s expectations for inflation over the next 10 years.
In conjunction with the shrinking of the Federal Reserve’s balance sheet, there has been a significant decline in banking system excess reserves. The explosion in banking system liquidity has been noted as a key driver behind the equity market rally since 2009; the subsequent draining may limit equity returns going forward.
Rural America has suffered a multiyear slump in prices for corn, soybeans and other commodities touched off by stiff foreign competition and a world-wide glut. Tariff retaliation from China, Mexico and elsewhere has further roiled agricultural markets and pressured farmers’ incomes.
BlackRock's "US-China relations" macro risk indicator has been declining.
The synchronized global growth story told throughout 2017 has decoupled as the percentage of countries in expansion drops below long-term average.
Sharp selloffs – such as that experienced in the fourth quarter of 2018 – don’t have a great track record as a recessionary indicator.
The 10-year U.S. Treasury Yield has firmly breached the headline-grabbing 3% threshold to 3.1% - the highest level since 2011. It is important to remember that rising rates – although painful over the short-term as bond prices move inversely to yields – are beneficial to fixed income investors over the long-term.
This month, the current U.S. economic expansion reaches the 107-month mark, making it the second longest economic expansion on record. The next milestone is 13 months from now – June 2019 – at 120 months and it is looking increasingly likely that this expansion will continue for more than a year and set the new record.
Earnings revisions have been on a strong upward trend since mid-2017. With first quarter earnings season wrapping up, companies have exceeded approximately 80% of analyst earnings estimates; therefore, providing an even higher growth rate than what was anticipated for earnings.
Global growth has stepped up in a synchronized fashion. Nearly all countries tracked by the Organization for Economic Co-operation and Developed (OECD) are recording positive growth rates – the first time since the global financial crisis.
Equity market volatility as measured by the volatility index (VIX) remained tepid throughout 2017. The market’s reaction to inflationary fears, increasing interest rates and a potential trade war has led to volatility roaring back in 2018.
The markets are conflicted between the benefits of tax reform and the turbulence of tariffs. The size of fiscal stimulus, driven by tax reform, dwarf the size of tariffs announced thus far. Nevertheless, tariffs and the potential for trade war have been a destabilizing factor for the markets and will likely continue to be until we gain further clarity.
Goldman Sach’s proprietary indicator, called the Global Leading Indicator (GLI), meant to provide an early signal of the global industrial cycle is showing signs of weaker growth in global industrial production.
The announced steel and aluminum tariffs have now gone into effect. Going forward, a 25% tariff will be placed on steel imports and a 10% tariff placed on steel imports. These tariffs are due in large part to the material trade deficit that the U.S. has – particularly with China. The monthly trade deficit for January widened to a 9 ½ year low likely adding more fuel to President Trump’s agenda of fair trade.
Expansion of profit margins have been a key driver of earnings growth in the U.S. since the global financial crisis. Should the Federal Reserve continue to raise rates and wage growth continue to grow, profit margins will likely come under pressure. Stronger revenue growth will need to offset this dynamic in order for earnings to continue to grow strongly.
We have witnessed a sharp acceleration in U.S. earnings upgrades as analysts have factored in the impact from the tax cuts and fiscal stimulus. The ratio of analyst upgrades to downgrades for U.S. large caps has spiked to the highest level since the data series started in 1988.
Pullback in perspective. The recent market correction has put the markets back on the trajectory of the last two years.
The dangers of “following the crowd” and chasing the latest trends are illustrated in the following chart. Strategies that provide inverse (e.g. “short”) equity volatility exposure gained significant attraction over the past two years as volatility remained abnormally subdued. As equity volatility spiked to a 2 1⁄2 year high recently, the popular Credit Suisse VelocityShares Inverse VIX Short-Term exchange traded note (ETN) – which had over $1 billion of assets - lost nearly all of its “value” and is now being liquidated by Credit Suisse.
Investors piled into equities during the month of January as the set the record for the biggest month of flows into equity funds on record, according to Bank of America Merrill Lynch. Interestingly, there was one group of investors that wasn’t so anxious to buy at these levels: company insiders who must report their purchases of stock in the companies they work for.
U.S. Treasury yields have been under pressure in 2018 while implied volatility is at record lows. This looks quite similar to that seen just prior to the “taper tantrum” in 2013 and could portend the beginning of the fourth bond market tantrum since 2014.
2017 was one of the calmest years on record with very steady returns. There were only eight days when the market moved by more than 1% during the calendar year. As the year moved, the calmness grew. None of the eight 1% moves occurred in the fourth quarter. While we believe 2018 will provide another strong set of returns for equity investors, they should be prepared for more heightened levels of volatility to accompany returns.
Global growth accelerated sharply in 2017 and the upswing became increasingly broad based throughout the year.
The Fed continued at a slow and steady pace with three rate hikes in 2017 while the ECB and BOJ stood pat.
Economic data are beating expectations by the most in nearly six years according to Citigroup’s economic surprise index. It’s massive run higher is one sign that the economy has gained momentum this year.
Broadly speaking, the economy remains in the goldilocks phase of the financial & business cycles.
Bitcoin’s meteoric rise in 2017 has been unprecedented; making other market moves that led to eventual bubbles look rather insignificant.
The U.S. economy expanded at a 3.3% rate in the third quarter of 2017; marking the second consecutive quarter of 3% GDP growth and the strongest quarter in 3 years.
Charting where the world’s largest economies fall in regards to economic, credit, and monetary policy cycles. A majority of countries continue to expand. However, higher volatility can be expected as we continue to progress into the later stages of the credit cycle and monetary policies become less accommodative.
How quickly things can change in just 10 years. Once dominated by the major corporate conglomerates, the five largest companies in the world measured by Market Capitalization are all tech companies. An illustration of how disruptive technology has become.
Synchronized global growth has been the dominating theme in 2017. Caterpillar’s dealer sales by region illustrate this theme as well – with global retail sales rising 13% year-over-year as reported in their third quarter earnings release
Economic cycles don’t die of old age. While the current economic cycle has been unusually long, when comparing the cycle with previous ones in terms of quantity – and not time – reveals an economy with plenty of time (and capacity) left for continued economic growth.
Hurricane Harvey & Irma trimmed US economic activity in September, primarily affecting manufacturing output. However, the nation’s economy showed encouraging resilience in a month of disruption as the flash estimate for the broader Manufacturing Index came in at 54.6; comfortably above the 50 point threshold that indicates expansion.
Strong Consumer Confidence, improving labor markets, and low interest rates are all contributing to the domestic demand forces driving the Eurozone’s recovery.
The end of an era for unprecedented monetary policy. The Federal Reserve announced on 9/20/2017 that it will start to unwind the easy money policy that it has pursued since the Global Financial Crisis and will begin to allow $10BN of bonds mature every month starting in October.
The output gap – which measures potential GDP, realized GDP, and estimated natural rate of employment – has narrowed; reflecting realized growth that is essentially in line with potential growth. Reaching a low of -6% in 2009, the level of “slack” in the economy has almost been worked-off.
Improving home values and rising equity markets propelled the total net worth of U.S. households further into record territory during the second quarter of 2017.