August has been an ugly month. Look around the world and most assets are suffering as the lagged reality of shrinking central bank balance sheets and a Fed-enabled dollar-shortage has sparked a renewed anxiety the likes of which we have not seen for a decade. There’s just one thing – despite all this turmoil, US stocks remain the cleanest dirty shirt as investor ignorance or faith continues to beggar belief.
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, feels the same way – questioning market participants’ cognitive dissonance: “The ‘Shining City on the Hill’ so far this month has seen eight economic data releases miss, three beat and one come in as expected. Nice start to Q3.“
The ‘Shining City on the Hill’ so far this month has seen eight economic data releases miss, three beat and one come in as expected. Nice start to Q3.
— David Rosenberg (@EconguyRosie) August 16, 2018
Visually it is easy – US Macro data plunged to 11-month lows today as US equities remain somewhat bulletproof…
A look around the world and it’s clear that the fecal matter is starting to hit the rotating objects in almost every asset class and geography. As Rosenberg exclaimed last week, “The only folks that can’t see it in the FX and commodity markets spend too much of their day gazing at the SPX and Russell 2000. There is no decoupling, just lags.”
No contagion, eh? The only folks that can’t see it in the FX and commodity markets spend too much of their day gazing at the SPX and Russell 2000. There is no decoupling, just lags. pic.twitter.com/521jXi9BiE
— David Rosenberg (@EconguyRosie) August 15, 2018
And as the chart below shows – with central bank balance sheets now contracting, ‘risk-on’ trades are being collaterally-damaged as dollar tightness spreads (except in US equities)
But amid all this US equity market euphoria, Rosenberg asks (and answers)- “Is the stock market flashing an anti-growth signal?”
Simply put, recent market strength is being driven by the S&P 500 Index’s industry groups that are least affected by slower economic growth.
An index tracking four defensive areas – consumer staples, health care, telecom and utilities – climbed 10.3% in the three months ended Thursday. A similar gauge of economically sensitive groups – consumer discretionary, energy, industrials and raw materials – gained just 0.5%.
With the incessant flattening of the US Treasury yield curve standing in direct opposition to the rise in US equity indices, Rosenberg concludes, “I’m asked what the Treasury market sees that the stock market doesn’t.”
His answer explains it all (now that the chart above has exposed reality):
“They both see the same thing – a return to stall-speed growth. Look at how the cyclical stocks are faring against the defensives, like Consumer Staples vs Discretionary. Not exactly the prettiest of pictures…”