INVESTMENT EDGE
US stock markets are leading the rest of the world higher. The intermediate term rally in the dollar has either reversed or put the case for over-weighting foreign investments on hold. I think we muddle through the summer/autumn months and then rally into year-end. Anyone thinking the same?
July's Charts on the Move video can be viewed at the link below
Yawwwwwwwn. Sideways chop within the Jan -Feb consolidation range until we see a catalyst. I thought maybe trade war fears would be enough to break the trend but apparently not. Bulls are still in charge. I don't expect to see a resolution for months so until then, sit back, enjoy the summer and check out this month's Charts on the Move video at the link below ...
When economist talk about the “yield curve” they are really just referring to a plot of yield versus varying bond maturities. An inverted curve is when the difference between the yields of long term bonds (usually 10 year) rates to short (usually 2 year) is negative (short term yields are higher than long). This is a very closely watched benchmark by knowledgeable investors because we know every recession that has occurred in the US over the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession, according to the Fed’s data.
While the US yield curve is still positive (NOT inverted) the global curve just recently inverted for the first time since 2007 where its inversion lasted briefly (less than 6 months). I have not seen any studies that show if global yield curve inversion has the same strong correlation to economic slowdowns (recessions) as it has in the US, so the implications of the crossover may or may not be of significance.
As a minimum though, it raises a warning flag for investors to take the portfolio off autopilot and have a plan. There is no question, a recession, if it were to ensue around the world would likely drag the US along. Economic slowdowns are rarely ever good for stock prices and when combined with us being in the latter stages of the 2009 economic recovery cycle while stock prices are at very extended valuations, next year looks like it could be shaping up to present challenges investors have not had to face in many years.
As you can see in the graphic below, for the most part US equities mirror those of the rest of the world. Well, at least we can say they tend to both move up and down together. There are times when one of the two considerably outperforms the other. The first instance of this performance divergence occurred beginning in 1986 when global equities turned tail and left US stocks in the dust. It took about a decade before they came back into balance.
For the next 20+ years the two pairs tracked fairly well except just before the 2007-’08 huge market draw-down where foreign stocks, once again, vaulted to the upside. In both cases of foreign stock out-performance, you needn’t look any further than the dollar for an explanation as it fell precipitously, bringing rise to foreign asset values.
Fast forward to today’s post-apocalyptic 2008 market crash revival, US stocks are massively outperforming. The reasoning may be flipped but the cause is still the same, the dollar. It’s been ripping higher since the 2009 stock market bottom. If you are like me and believe the dollar is on a mission to much, much higher levels, its likely US stocks will continue their tremendous out-performance. Keep this in mind as you rebalance your portfolio. If I am wrong, it will present investors with one the greatest reversion-to-mean trades in recent history. Forewarned is forearmed.
The US stock markets continue to consolidate and digest its huge 2017 year run-up and subsequent double digit correction. The lone exception being small cap stocks as they have moved on to all-time highs. Will the rest of the market follow suit? The benefit of the doubt has to be given to the prior underlying trend but I don't think the answer will be resolved any time soon. Until then, check out this month's Charts on the Move video at the link below ...
