Multi-tasking has become a way of life for many people these days. I’ll admit that there are times when multi-tasking can boost productivity but, as usual, people have taken this concept way too far.
On my short commute to work the other day, I saw someone putting on makeup while driving. I’m not talking about a quick swipe of lipstick at a traffic light. It was the kind of makeup regimen Cher goes through before concerts, only this lady was doing it at 45 miles per hour.
I also saw a guy eating breakfast, and it wasn’t a breakfast burrito in one hand and the steering wheel in the other. This guy was eating a continental breakfast complete with freshly squeezed orange juice that he was juicing himself while driving through a school zone.
When did focusing on driving and the road become the least important activity you can do when your car is in motion? People like these are doing too much.
Investors also tend to do too much. They focus on every headline, technical indicator or price movement in order to make investment decisions.
Right now, there are any number of headlines to distract investors: North Korea, Trump, and bubbalicious talk of overvalued markets, to name just a few.
But while they are focused on the event du jour, investors are missing the fact that the most important catalysts for asset prices are potentially shifting and completely changing the investing landscape in the process.
Desert Island Data
If I was stranded on a desert island and was only allowed two financial market data feeds with which to make investing decisions, I’d pick economic growth and inflation data. Quite simply, nothing else impacts the direction of asset prices more than the trajectories of growth and inflation.
With that as the backdrop, the trajectories of U.S. growth and inflation over the last few months paint a different picture from what we’ve been experiencing for over a year now.
When economic data that has been moving in one direction for a long period of time suddenly shifts to the opposite direction, I’ve learned to sit up and pay attention.
U.S. growth bottomed last June and has been steadily accelerating ever since. However, several growth-oriented data sets have started to show a slowdown in activity: durable goods, factory orders, industrial production, and manufacturing and non-manufacturing PMI. The U.S. consumer doesn’t look a lot better. Last week the latest retail sales report showed that sales have now slowed in five of the last seven months.
But it’s not only the lagging economic data that is signaling a possible shift in direction. Regular readers of Vague Destination are familiar with my U.S. High Growth and Slow Growth indices. These are my proprietary, real-time indices that provide insight into whether U.S. growth is accelerating or slowing.
Since last September, my High Growth Index has outperformed the Slow Growth Index each month. At the end of July, the High Growth index had outperformed the Slow Growth index by 500 basis points for the year to date.
However, during August, that cross-market dynamic shifted. The High Growth index declined 1.7%, while its Slow Growth counterpart gained 5%. That is a massive 670 basis points of outperformance in just four weeks!
Now, halfway through September, the Slow Growth index maintains its relative performance lead over the High Growth index.
These indices are not foolproof, but they have a long track record of being right more than they are wrong. Based on both economic and real-time market data, U.S. growth could be peaking as we speak.
The other desert island-worthy data, inflation, is also showing a possible shift in direction. The rate of U.S. inflation has been declining in a stair-step fashion since peaking in February, producing five consecutive monthly declines. Then, for the past two consecutive months, both consumer and producer inflation accelerated. This upward move in inflation alone bears monitoring because it greatly increases the likelihood of a Fed rate hike in December, which investors are currently betting won’t happen.
More importantly, putting these two data sets together paints the most notable picture of all.
The Big Picture
From July 2016 to February 2017, the U.S. enjoyed a period of growth and inflation accelerating alongside each other. This is a very conducive environment for risk assets of all kinds, especially equities.
Since February, U.S. growth has continued to accelerate, but the rate of inflation has been slowing. This means “real” growth was accelerating, which is also conducive for equity markets, except sectors sensitive to inflation, like energy.
Now, however, we quite possibly find ourselves at the beginning of a growth-slowing, inflation-accelerating regime. If this regime comes to fruition, Q4 2017 will be very interesting because institutional and retail investors are crowded into a handful of trades that have benefited from improving U.S. growth for the last year.
Keep in mind, growth is already slowing in the eurozone, and China appears to be in the beginning stages of slowing as well. These three growth-slowing developments are new and, more importantly, very few people are discussing them.
Whether these recent data points will continue their downward move or will rebound higher in the coming months remains to be seen. But again, when these shifts occur, I pay attention because there is a lot of money lost, and made, at these turns of economic environment.
Do your portfolio a favor and don’t do too much. Focus on the information that is “desert island-worthy” and ignore everything else. To do otherwise brings the same level of risk to your portfolio that driving while eating crab legs brings to your health.
As always, stay data dependent, process driven and risk conscious, my friends.