The United States
In the aftermath of Friday’s drubbing of the market leaders, I’m sure you did as I did read a bunch of things over the weekend so I won’t bombard you with too much more other than to say gravity does exist and human nature never changes no matter how much central bankers have tried to suspend them. The most interesting thing I read was from my friend Marc Faber’s monthly newsletter where he quotes a recent piece from Williams Markets Analytics who separated the performance of the top 5 S&P 500 market cap stocks from the index and compared with the balance called the S&P 495. Since 2013, the S&P 5 was up 227% thru May 3rd while the S&P 495 was higher by just 27%. Year to date, the S&P 5 was higher by almost 25% as of May 3rd while the S&P 495 gained 3.9%. Thus, and I’m stating the obvious in light of these numbers, in making the ‘right call’ on the direction of the ‘stock market’ as defined as the S&P 500, all one needed was essentially predict correctly the direction of the top 5 names.
For a valuation perspective I’ll take this comment from my friend David Rosenberg from his piece on Thursday before the Friday selloff: “The ‘FAANG’ stocks now aggregate to a market capitalization of $2.4 trillion which is the entire size of the Canadian economy. Five stocks! Meanwhile, their earnings come to $77 billion in sum (and half of that from one company: Apple!). Amazon generated $2.3 billion of earnings last year and yet its market cap is $483 billion.”
I’ve said many times that valuations don’t matter until they do (as valuations are awful short term timing metrics but very good long term) and a continued tightening of US monetary policy along with the gradual actions of others as the year progresses makes them matter, now. Also, this tightening will slow economic activity during a time when growth is still only 2% anyway. At the end of the day, as AMAZING and transformational as these companies are, two are advertising and media companies that are economically sensitive, one is a retailer in a business that is extraordinarily competitive that happens to have a cloud business whose margins will decline in perpetuity, one is a movie channel and the other has its biggest profit contributor from a product whose markets are saturated.
I’m not trying to use this information to make a market call from here on these names but days like Friday and the gut check it creates deserves some perspective on what these stocks have meant to markets and to investing styles (whether passive or active). Also, the real market test for them is not necessarily the current correction they are in but what happens on the bounce after it finishes. Will that eventual and inevitable rally lead to new highs or a lower one?
The pace of business loan growth in the US continues to slow. Out on Friday, C&I loan growth has slowed to just 1.7% y/o/y vs 2.6% a month ago and well below the 6.3% pace at the end of January. I believe it’s a combination of modest economic growth, policy unknowns in DC and large tapping of the capital markets in the beginning of the year.
Let’s talk some politics in Europe and not in the UK. Emmanuel Macron and his party dominated yesterday’s Parliamentary vote giving him the biggest majority in the Assembly since 1993. The CAC sold off by 1% as the news is not surprising and it adjusts lower with the rest of the global markets but this is a special moment for France and a real opportunity to get out of the economic paralysis that its giant welfare state has created. Labor market liberalization is a big focus of Macron. French oats are the real beneficiary as the 10 yr yield is falling by 5 bps to just .60%, the lowest since November.
Also of note in Italy, in almost every local election yesterday the Five Star Movement did not make it to the run off vote to follow. They finished in 3rd or 4th place in just about every city that voted. As Reuters reported, Sunday’s election called on some 9 mm voters in more than 1,000 towns and cities, spread throughout Italy, making them a useful gauge months before the parliamentary ballot.” The Italian stock market is selling off with everyone else but Italian bonds are rallying with the 10 yr yield falling by 6 bps to the lowest level since January. This party was the markets biggest fear whether an election is called early for this fall or continues as is next year. The political worries for the region entering the year have basically been neutered. I remain bullish on the euro.
After a solid Q1, the industrial production figures out of many European countries in April continue to be very mixed with many missing expectations. Italian IP was lower by .4% m/o/m and that was below the estimate of up .2%. Both manufacturing and mining contributed to the miss. Remember, better growth in the eurozone only gets them to a pace of gains of 1.5-2% this year.
We heard today from ECB Executive Board member Benoit Coeure and he acknowledged that “there was a sense of progress” on inflation getting to or near their 2% target. He also said “but it’s not yet quite enough to start discussing tapering, we’re not there yet.” Well, considering that current QE plan is supposed to end in December, they of course have to start internally discussing it because we know there won’t be a hard stop come December. While many are pointing to color from the ECB in September, they do meet again in July and don’t discount some discussion then. The euro is higher and back above $1.12.