It’s been a month since I dedicated this space to discussing what fundamental data and the markets are telling us about US growth expectations, and I felt like today was a good time to check in with an update.
Last week the S&P 500 index rose to within 3 handles of its all-time high and its ETF equivalent, SPY, actually made a new all-time high by a penny. When we last discussed the US in great deal was in The Whaley Report for January 20.
At that time, we were in the midst of several weeks worth of data that showed the US growth wasn’t deteriorating but growth was certainly starting to decelerate on a month-over-month basis. The S&P’s performance was mirroring this data and was down 0.5% year-to-date through January 20.
My “Slow US Growth” index was up 2.51% year-to-date versus my “High US Growth” index which was up only 0.42%. Slow growth asset classes were outperforming high growth assets by 209 basis points, signaling that investors were positioning themselves for slower growth in the months ahead.
So what has happened fundamentally and across markets since then? It has been more of the same, slowing data across all segments of the US economy. Last week was no different.
Empire manufacturing declined 64% month-over-month from January and 38% year-over-year. It's important to note that this is an extremely volatile data series prone to large swings month-to-month.
But what struck me was that the 38% year-over-year decline was the first decline after 8 straight months of year-over-year gains. That’s the margin and worth noting.
On the back of that data, the Philly Fed survey dropped to the lowest level in a year and weekly unemployment claims number barely budged week-over-week and is clinging to its 8-month average.
We received a slew of housing data last week. It’s been interesting to me how little attention US housing data seems to have gotten over the last couple of months. Existing home sales hit their lowest level in 18 months after peaking last July.
Housing starts, which peaked a year ago, declined 16% month over month, the largest such decline in 3 years. Starts also declined 10% year-over-year and bad weather was blamed for both declines. That’s interesting because housing starts peaked last March and declined for 3 straight months last summer.
How was the weather then? Mortgage applications also declined 16% month-over-month, the largest such decline in 14 months.
In addition, home purchase applications are at their lowest level since 1995. Can you see the trend here? What’s occurring at the margin in US housing is not good and in fact, is accelerating to the downside.
The real concern in housing is the fact that year-over-year figures aren’t stabilizing at lower levels, they are actually beginning to slide faster. The outlook for housing continues to get bleaker when you add in the fact that the economy is slowing, inflation is accelerating, and US consumer wages and savings are declining.
The one bright spot for housing could be that with slower US growth will come lower yields (without Fed intervention) which in turn will bring mortgage rates lower too. These lower rates could be stimulative and help pick up housing activity. But this impact is months and months away.
The Markets' Message
So, fundamentals in the US have not improved over the last month but what are markets telling us? As I mentioned earlier, the S&P was down 0.5% year to date as of a month ago. As of Friday’s close the S&P is now down 0.43% year to date. So the S&P has flatlined over the last month.
I also mentioned that on January 20, the spread between US slow growth assets and US high growth assets was 209 basis points wide, in favor of slow growth. As of Friday’s close, that spread is 821 basis points wide, in favor of US slow growth assets! That is a huge divergence in performance through the first 8 weeks of the year.
The scary part for high-growth investors is that my US Slow Growth index still has not broken out above its downtrend line that started in September 2012. As of Friday’s close, that index is approximately 1% away from that line.
If the index closes above that line for 3 consecutive days, the spread between slow and high-growth assets could accelerate from here. Gold, utilities, REITs and Treasuries have been on a tear this year while financials, consumer discretionary and the broader market have struggled.
The Real Dynamic Duo
Fundamentals and market activity is dynamic and needs to be constantly monitored. However, its clear that growth is slowing and market participants are continuing to re-position themselves for slower growth in the months ahead.
Make sure you keep your eye on the ball. Let the media and blogs talk about the Fed taper or untaper, Bitcoin and whatever else they want to discuss.
Focus on what's happening at the margin of fundamental data and how investors are positioning themselves. In the world of investing, those are the only two things that matter, the rest is just noise.