OVERVIEW AND CONCLUSIONS
The frantic price rally in several key marketplace benchmarks commencing around end year 2018 probably reflected a fervent hunt for “yield” (“return”) by “investors” and other asset purchasers. In addition to buying the S+P 500, yield seekers searched for sufficient return in domains such as other advanced nation stocks, emerging marketplace stocks, lower-grade United States corporate debt, emerging marketplace sovereign debt securities denominated in US dollars, and the petroleum complex. Easy money policies and pronouncements by the Federal Reserve, European Central Bank, and their comrades greatly encouraged these eager yield searches.
That ferocious yield hunt has diminished and the associated price rally for these signposts in general probably is finished. The terrifying slip in the S+P 500 from 7/26/19’s 3028 summit, in conjunction with the renewed tumble in emerging marketplace equities and the retreat in petroleum prices, signals a reversal of the avid enthusiasm of the hunt for yield in these arenas. The recent plummeting interest rate in the US 10 year government note underlines this. Although the US Treasury note’s yield decline commenced in autumn 2018 at around 3.25 percent, and although chroniclers can attribute further erosion during early 2019 to central bank easy money talk and schemes, its recent dive beneath two percent likely represents a “flight to quality” stage for UST yields.
Therefore, dutiful marketplace pilgrims who raced to identify and achieve “good” (acceptable, reasonable) returns (by purchasing asset classes such as stocks and commodities) at the end of calendar 2018 and for several months thereafter in these sectors probably have started running for cover (begun to liquidate their long positions). Many other investors/owners in these marketplaces probably are running for the exits too.
America and the rest of the world are in the waning period of the epic economic expansion that followed the dreadful economic disaster of 2007-09. Even if a recession does not occur in the United States (or in advanced nations in general), a noteworthy slowdown in global real GDP growth (including China and other emerging realms) likely is underway. Ongoing or further rounds of central bank easing probably will have limited effectiveness in maintaining adequate economic growth.
Marketplace history of course does not necessarily repeat itself, either entirely or even partly. Apparent marketplace convergence and divergence (lead/lag) relationships can and do change, sometimes dramatically. Nevertheless, especially since around autumn 2018, the relationship between the S+P 500, emerging stock marketplaces, the United States 10 year government note, petroleum, and the broad real-trade weighted US dollar in key respects increasingly has resembled that of the mid-2014 (and especially mid-2015) to first quarter 2016 time horizon. (One can trace the 2014/2015 trend relationship antecedents back to around spring 2011.)
In the prior era, noteworthy price divergence existed between the S+P 500 and emerging stock marketplaces. However, beginning sometime around late 2014, convergence (less divergence) began to develop between these realms. By spring 2015 (May 2015 high in the S+P 500; late April 2015 emerging stocks top), prices in these equity playgrounds had converged. Prices for both cratered thereafter until first quarter 2016.
Though yields for the United States Treasury 10 year note began to fall in early 2011, the accelerating drop from the yield highs of July 2014 and (especially) June 2015 was a critical factor in relation to stocks and other financial marketplaces. The initial key low yield for the UST occurred in first quarter 2016 (alongside stocks). The decline in commodities in general started in spring 2011, and raced downhill after June 2014’s interim top (and especially) after May 2015 (note the convergence with emerging marketplace stocks and eventually with the S+P 500). Commodities, like stocks, bottomed in first quarter 2016.
The gradually strengthening broad real trade-weighted US dollar intertwined with these various trends. After making a major bottom in July 2011, it gradually appreciated. The dollar’s climb after September 2014 was significant; its fourth quarter 2015 rally above March 2009’s financial crisis peak substantially influenced other financial battlegrounds (note the convergence between and sharp bear moves in the S+P 500 and emerging marketplace stocks), achieving a key high in first quarter 2016.
In both that past era as well as recently, UST 10 year yields dropped substantially. In those two periods, emerging marketplace stocks and commodities crumbled (and alongside each other).
Especially around late 2015, the bull move in the broad real trade-weighted dollar (“TWD”) became remarkably strong. Underline its violent charge above first quarter 2009’s financial crisis top. In the “current” marketplace (which includes many preceding months), the TWD likewise has been very robust. Though the TWD did not push through the economic disaster top recently, it has remained above it for many months. The key parallel between the two periods thus is a strong dollar, and one above the financial crisis high.
Underscore the significant divergence between the S+P 500 and emerging marketplace stocks in both epochs. After its spring 2011 interim top, the S+P 500 continued to attain new highs, peaking in spring 2015. In contrast, emerging marketplace stocks in general were in a sideways to down trend beginning in spring 2011 (though they eventually achieved price convergence with the S+P 500 by spring 2015).
What about the current stock landscape? The divergence between the S+P 500 and emerging marketplace equities probably began before autumn 2018. Emerging marketplace stocks started their bear descent in first quarter 2018. Although the S+P 500 made an important interim high in first quarter 2018, it attained new highs (though not much above the 1Q18 top in percentage terms) up through end July 2019. Therefore divergence between the S+P 500 began around late 1Q18 and continued into summer 2019.
Why the substantial divergence between the S+P 500 and emerging/developing nation equities beginning in early 2018? The passage of America’s tax “reform” legislation in late 2017 was a critical difference. American corporations have reaped major benefits (higher earnings/profits) from this, thus helping to propel the S+P 500 upward. Emerging stock marketplaces (and those of other advanced nations) did not receive such benevolent new legislation.
The S+P 500’s decline since its late July 2019 high probably is the start of price convergence between it and emerging marketplace stocks. Given the similarities of (parallels between) interrelated price movements involving emerging marketplace stocks, commodities (petroleum), the UST 10 year note yield, and the broad real trade-weighted dollar during both eras, convergence between the S+P 500 and emerging marketplace stocks is probable. Thus the S+P 500 probably is in, or soon will begin, a bear trend. Therefore the S+P 500 retreat will confirm the slowing down of the global economy. Keep in mind the spring 2015 association (linkage between) the S+P 500 and MXEF highs and the aftermath in those and other marketplaces.
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Running for Cover- Marketplace Exits (8-9-19)