In my view the headlines are ugly. Ebola. Ukraine. ISIS. Eurozone. Japan. China. Emerging markets.
The question at hand is if the headlines are so ugly why the advance in the S & P 500 and Russell 2000?
I must write other markets are not feeling the love. Commodities have been crushed. Non-investment grade bonds are ugly. Many small capitalized companies are vastly underperforming.
Will the popular averages soon roll over? I will argue the opposite—those markets that have been crushed may soon outperform.
Year-end tax loss selling typically reaches its apex the week before Thanksgiving and those issues that have been crushed historically outperform going into the New Year.
I think the odds favor the economic advance in the US will continue at the expense of the rest of the world. But a major reason why 3% growth does not feel like 3% growth is from the lack of stated inflationary pressures. Nominal and real GDP are around the same levels. Typically 3% real GDP occurs when nominal GDP is around 6% hence growth feels stronger.
As noted many times, the US economy is awash in liquidity. Ultimately monies gravitate to the sectors with the greatest potential return with the least amount of risk.
The entire developed world is or has experimented with QE. The US Federal Reserve has publically stated a 2% to 4% inflation rate is desirable to “inflate” general asset values.
The US economy which is about 3x bigger than its closest competitor and represents 23%-24% of global production, operates on a “just in time” inventory and production basis. This environment suggests if demand suddenly accelerates, spot shortages could quickly emerge that could cause price spikes.
If this were to occur, I would argue any commodity sensitive bonds or equities should advance and treasuries should trade lower in price and the S & P should continue its advance albeit not at the rate of those vehicles that are “asset” backed.
Wishful thinking for those that are long such issues? Many of the commodity backed issues have been crushed with the decline in oil. Why should the inverse not be true? It has in times past.
Yesterday’s market activity was muted with many commenting OPEC will not lower production at its November 27 meeting. Yesterday’s data was a non-event. Today the NAHB and the PPI are released. How will these statisitcs be interpreted?
Last night the foreign markets were up. London was up 0.50%, Paris up 0.75% and Frankfurt up 1.20%. Japan was up 2.18% and Hang Sang down 1.13%.
The Dow should open little changed as many are asking are valuations to stretched and has the averages rebounded to far to fast. The 10-year is unchanged at a 2.33% yield.
