It’s becoming a familiar refrain: US growth is peaking.
Purely from a “feel” perspective, that seems surreal. This time last year, the world was careening into a depression — with a “d.” The US economy was busy contracting the most (on a quarterly basis) in a hundred years. Now, a mere 13 months later, we’re talking about “peak growth” following a summer “bonanza.”
What a time to be alive. (And let us not forget that for more than 3.1 million people globally, that’s an extremely awkward turn of phrase.)
Given the enormity of the human tragedy, market considerations are everywhere and always trivial. No caveats about one’s job description can change that. Saying things like “While recognizing that there are more important concerns than equities, our jobs require us to consider…” is just a euphemistic way of saying “We picked an occupation which, when the world falls apart, is largely meaningless.”
I don’t mean to be derisive, but that’s the reality.
With that out of the way, those of us lucky to be alive and living in advanced economies, have the luxury of pondering what’s next for our stocks, while 1.4 billion people in India worry what’s next for their oxygen levels.
When it comes to US equities and “peak growth,” the bad news is that stocks tend to struggle. “During the last 40 years, investors buying the S&P 500 when the ISM Manufacturing index registered above 60 have experienced a median return of -1% during the subsequent month and a paltry +3% return during the subsequent year,” Goldman observed.
That’s not particularly inspiring. As most readers are well apprised, ISM manufacturing printed the highest since 1983 in the March survey. I called it “a giant screaming fireball,” because I never employ hyperbole.
Jokes aside, it is — a giant screaming fireball, I mean. In fact, I’ll need to recalibrate the y-axis soon (figure below).
Writing Monday, Nomura’s Charlie McElligott reiterated that on the bank’s quadrant analysis, a transition from “Recovery” to “Expansion” can be associated with the “overall market grinding sideways to modestly higher.”
At the same time, Nomura’s Sentiment Indicator is sitting in the 99.6%ile (0.4% to go!). As you can imagine, that doesn’t backtest particularly well in terms of forward returns. The median three-month return for the S&P is -2.1%.
“Although growth will remain both above trend and above consensus forecasts through the next few quarters, the pace of growth will peak within the next few weeks as the tailwinds from fiscal stimulus and economic reopening begin to fade,” Goldman’s David Kostin remarked, in a recent note.
The good news is, Goldman still sees stocks grinding higher as growth decelerates during the second half of the year. “Equities generally appreciate when the rate of economic growth slows as long as growth remains positive, albeit at a slower pace,” Kostin said, noting that even as “US growth is peaking, the growth rate should remain strong.”
For McElligott, the “next narrative” once the June Fed meeting is behind us, will entail a “transition from the ‘reflation renormalization’ into the next stage, where the Fed may acknowledge the reality of QE tapering and the slow removal of the ’emergency liquidity’ regime we’ve been operating under.”
What happens after that is anyone’s guess.
In the days from 3/23/2020 to 4/26/2021, the SP500 has advanced about as much as it did in the same number of days after 3/6/2009, and with a similar trajectory.
In April 2010, banks were still shaky, consumers overextended and fearful, foreclosures were accelerating and jobs were still being shed, and the $900BN stimulus was only starting to tickle the economy (remember “shovel-ready”?).
In April 2021, banks and consumers are flush, forbearance numbers are declining, there are more job openings than workers applying, and the stimulus so far has been 4X larger and far faster-acting. The big weight still pressing down is Covid.
We may be at peak growth in some data series. In others, peak growth came many months ago. Peak US GDP growth was actually in 3Q20 (or was it 2Q20? not at my desk to check). Okay, the annualized quarterly convention for US GDP is kind of artificial, but so are the conventions for most data series.
Taking any of those past peak growth points as the exit signal would have been a (big) mistake.
This is not your typical recession/recovery. It is a once-in-a-century event, or even rarer.
[Gotta hop mid-post – will continue later]
Ok, resuming.
I think that many of the standard oscillators and indicators we use are likely to be unreliable. In many cases, they are calibrated for “normal” periods, which this is not. Or, they may only work for very short-term trading purposes.
I also think that many of the rule-of-thumb valuation measures we use are also likely to be unreliable.
While I’ve been watching the options-derived indicators – gamma, vanna, etc – and believe them to be quite useful, that usefulness is only for short time periods. Since most options are short-dated, much information value evaporates monthly.
There’s always the momentum, sentiment, and related approaches. But the market is rotating so quickly through styles and themes that you’ll be chasing from one sector to another, and if not a day late and dollar short, you’ll be not-enjoying the tax rate applicable to short term capital gains.
To make a long story short, I don’t think there is much substitute right now for going back to the basics. You have to have an opinion for the whole macro-country-sector-industry-company chain, the fundamental valuation of your security based on long-term cashflows, assess risk, and place a bet.
This is so time-consuming. It can easily take a week of work to develop, research, and place a single bet. But, really, who needs more than 30 securities in a portfolio anyway?