Stocks keep rallying.
On Monday US stocks were higher across the board, continuing last week’s rally that was the year’s best. Crude oil prices also rallied on Monday with West Texas Intermediate crude rising 5%.
First, the scoreboard:
- Dow: 16,612, +220, (+1.4%)
- S&P 500: 1,944, +27, (+1.4%)
- Nasdaq: 4,567, +63, (+1.4%)
- WTI crude oil: $33.35, +5%
Markets Can Be Scary
Last week things seemed to be turning around. Monday’s rally affirmed the bulls.
But because sentiment lags price both on the way down and way up, Steven Englander at Citi found that almost every client he talked to last week when he hopped a flight to Asia thought the world economy was a “black hole.”
The prevailing view is that the global economy is like a shopping mall on the rocks. One anchor store gave unlimited credit to suppliers who overproduced on a massive scale. The second anchor gave free credit to customers who don’t want to buy anymore. The interior tenants are stressed by ineffective management, a product mix that no longer appeals, pilfering and dismay that the consultants they hired introduced failed strategies.
I don’t agree with this view, at least with respect to the US and the divergence trade, but I was clearly in a small minority in not seeing the global economy as a black hole.
And this is scary because both decrepit malls and black holes are not reassuring images for investors hoping to find some solace during what has been a very stressful year.
For his part, Englander thinks these concerns are somewhat overblown and is more sanguine about the future growth trajectory of the global economy than the investors he met with. But this is what’s out there, still.
Meanwhile here at Business Insider, Henry Blodget was out over the weekend with his latest warning that stocks could crash. With an assist from John Hussman, Blodget argued:
Hussman’s key observation about that chart — and the charts of many other market crashes in history, the most recent two of which he has correctly called in advance (2000 and 2007) — is that market crashes generally follow the same pattern.
First, in a market in which stocks are highly overvalued (as they are today) and in which investors are increasingly risk-averse (as they are today — see the spreads on interest rates between safe and risky bonds), crashes are much more likely than they are in any other market environment.
Second, crashes do not just happen suddenly — for years everything’s great and then one day the market just falls out of the sky. Rather, crashes develop over many months. And the “crash” itself — the period of massive, near-vertical market losses — generally starts after the market is already down about 15%.
That’s the insight to note in the chart above.
And here’s that chart:
Andy Kiersz notes that for long-term investors, there really is only one thing to keep in mind: stocks go up.
This chart from Kiersz — with an assist from Robert Shiller — shows the returns if you bought and held stocks for any month over the last 140 or so years.
Some months served as better buying opportunities than others, but the best thing to do was buy and hold. Definitely hold, at least.
Of course, this trend might turn out to be a once-in-several-generations fluke and stocks might be a lousy investment going forward. But as is the case in all investment research, though past performance may not reflect future results, all we’ve got is the past performance.
Recession Watch, 2016
Ward McCarthy at Jefferies doesn’t think the flattening of the yield curve means we’re heading for recession.
“Is the flattening trend in the yield curve signalling that the US economy is headed for a recession? The answer is no,” McCarthy wrote in a note to clients Monday.
“The slope of the coupon curve, as measured by the spread between the 2-year and 30-year, has averaged 144 bps,” McCarthy wrote. “By historical standards, consequently, the current slope of the yield curve is steep, not flat.”
Steep! You never hear that! 2016 has been about one thing and one thing only: flattening yield curves and recession probabilities. Flattening — let alone inverted — yield curves are bad. But in a post-QE, NIRP world it’s worth thinking about how much we can glean from this curve, and if the traditional dynamics we’ve learned impact the bond market and the world economy are still in play.
Related: are online lenders telling us something bad about the economy?
Rates at online lenders like Prosper and Lending Club have gone up, but so has the Fed’s benchmark rate. Additionally, overall financial conditions have tightened.
But there was also an uptick in delinquencies from some of these lenders’ borrowers in the second half of 2015. So, what to make of it?
Well, consumers not paying back their loans is not a good sign. But even if you’re a creditworthy borrower on paper, needing to take out a loan from an online servicer that charges 14% or 15% (instead of, say, a bank) must indicate some kind of financial stress that a small hiccup in one’s standing would upset, right? Maybe!
The thing is: there are lots of signs that the economy, particularly the financialized economy, has had a tough six months. This doesn’t mean, however, that the whole thing is rolling over.
The ‘Big Short’
Auto sales have been on fire and the idea that subprime auto lending would create the next “Big Short” opportunity has been around for a while.
But there’s a problem: you’re betting against cars, not houses.
A story earlier this month from Bloomberg News said that some investors were looking to bundle auto loans and short them a la the famous trade executed by the heroes of Michael Lewis’ famous book about the financial crisis’ big winners.
(Also: a movie.)
But so while a problem with this trade is certainly that people are calling it the next “Big Short,” that these loans are of shorter duration and smaller magnitude, not to mention backed by a readily re-possessed asset, makes them not nearly as potent at shorting opportunity as a house.
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