Wednesday, October 16, 2019

"Stock Market Performance Following a Weak Manufacturing PMI and Negative CEO Sentiment"

From Upfina, Oct 15, 2019:

The Bear Market Checklist
As the yield curve steepens, calls for a recession are growing because usually after yield curve inversions, steepening is coincident with recessions. The 10 year 3 month spread has gone from inverted by about 50 basis points to slightly positive. Firstly, that’s not enough to be consistent with a recession if this indicator is accurate. More importantly, this can be a bullish steepening. The curve inverted because investors were very bearish on nominal growth. The long bond yield fell significantly. If the long yield increases, it means investors are becoming more bullish on nominal growth. That would also steepen the curve, but it obviously wouldn’t be problematic.
On the one hand, the Fed hiked rates into a slowdown in 2018. On the other hand, it wasn’t the hiking that caused the inversion (Fed controls near term rates). The Fed was correctly in the easing mode when the inversion occurred this year. The Fed has significantly eased while the US economy still isn’t in a recession. If the Fed’s rate cuts have a positive effect on the economy in a lagged fashion, causing expected growth to rise, the yield curve will normalize.
Is CEO Confidence A Good Indicator For Investors? 
There always seems to be a new popular bearish chart that explains why a recession and bear market are coming. Be careful of these new signals when most traditional indicators don’t comply. It’s not great to see CEOs very bearish on the economy since they impact capex plans, but at the same time the ratio between the leading and coincident indexes isn’t signaling a recession, jobless claims are low, and consumers are confident.

The chart below compares CEO sentiment with the total returns in US stocks.
CEOs are often bearish at the bottom in stocks. CEOs aren’t alone as investors are currently also bearish. Compared to how well stocks have performed recently, CEO bearishness is excessive. It’s clear management teams are bearish because of the combination of the trade war and cyclical slowdown. This explains why confidence fell below the prior slowdowns even though growth may not be as bad. That doesn’t imply a recession though. Many investors give too little credit to the cyclical slowdown. Even with a worsening trade war, there are ways to avoid a recession.
Stocks Do Better With A Weak Manufacturing PMI
It’s counter intuitive for bearishness among CEOs to be a positive for stocks. Similarly, the chart below shows when the ISM manufacturing PMI is below 50, it’s a good sign for future S&P 500 returns....
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