Paulsen's Perspective
Mo Don’t Like SLOW?
Momentum investing is an investment strategy focused on profiting from a continuation of existing trends in the stock market. Stock prices which rise are more likely to keep rising. Buying stocks with strong positive price momentum (Mo) has long been a popular strategy.
A Whiff Of Stagflation?
Two indicators based on recent movements in the 10-year U.S. Treasury yield and the U.S. Dollar Index suggest economic momentum is likely to slow in the next several months while inflation continues to rise. That is, these indicators suggest the potential for a whiff of stagflation yet this year...
Betting On An Earnings Beta?
Many investors are betting robust earnings this year will allow the stock market to regain its mojo. Earnings results should be spectacular, boosted by both a synchronized global recovery and by a sizable tax cut. However, the question for stocks is not whether companies will deliver, but rather, whether the stock market will respond?
Quandaries
Investors often face quandaries. Always present is whether the markets will rise or fall? Currently, a few perplexing issues are interesting and deserve some pondering. Is new leadership evolving in the stock market? Should you buy regulated or nonregulated FANGs? Why are energy stocks doing so well in Emerging Markets and so poorly in Developed Markets?
Payroll Friday PAY?
It’s not a question of IF, but rather WHEN. The U.S. output gap finally closed late last year, the unemployment rate is on the cusp of breaching 4%, and the pace of economic growth both here and abroad remains healthy. Wage inflation is going to rise above three percent soon! Maybe tomorrow, maybe later?
Markets’ Whispers
Although struggles within the stock market are capturing most of the attention, stress signals are being whispered across the financial markets.
Yield Curve Watching?
The biggest risk facing investors today is the start of the next recession. In a few months, this recovery will enter its 10th year and challenge the longest ever in U.S. history. Just prior to the next recession, the stock market will likely enter a bear market while credit quality deteriorates significantly. Although volatility and corrections are always present in the financial markets, recession is what is feared most.
No Panic?
Throughout most of this bull market, there has been too much panic. In the minds of investors, a return to the 2008 crisis or the second coming of the Great Depression was always just around the corner. In the last couple years, however, the U.S. economy has returned to full employment, the output gap has closed, real GDP growth has moved away from being stuck at slightly above 2% to perhaps trending closer to 3%, and the global economic recovery has synchronized in a positive way.
The Popular/Panned (PP) Ratio
Bull markets do not age by the clock but rather by their character and often end with investor aggressiveness and the comfort of popularity. In the latter stages of a bull market, confident investors usually prefer hares (i.e., aggressive, fast moving, high beta investments that have been highly successful and are therefore wildly popular), while tortoises (i.e., conservative, high quality, defensive stocks that only widows, orphans, and worrywarts would own) become universally panned!
Research Residuals
Just as a well-diversified portfolio is comprised by a variety of assets with uncorrelated returns, investment strategies often evolve from seemingly unrelated thoughts or perceptions. Individually interesting but essentially unrelated concepts sometimes expose a picture not otherwise considered...
Rarefied Air?
Tariffs have been the focus so far this week, but tomorrow morning all eyes will turn to the jobs report. Will there be another “hot” wage number or will wage inflation cool, easing recent concerns about higher inflation?
Zone Coverage?
During the last couple years, cyclical sectors within the stock market have significantly outperformed defensive sectors. Robust economic growth and rising earnings expectations have driven investment flows toward economically-sensitive stocks. Moreover, many defensive stock market sectors have struggled with rising yields. If the stock market keeps rising, cyclical leadership may continue...
“Curb Your Earnings Enthusiasm” for Stocks?
Significant U.S. tax reform and a synchronized global recovery have stoked expectations for corporate earnings in 2018. By all accounts, corporate performance this year is poised to be spectacular. But, will this ensure solid performance from the stock market?
"Overheat" Often Comes In Threes!
Calm returned to the financial markets last week after both the stock and bond markets were rattled by a rare inflation scare. Perhaps the sharp but brief 10% correction in the U.S. stock market was enough to launch yet another upward leg in the ongoing bull market?
When Good News Becomes Bad…
Throughout 2017, positive economic reports boosted the stock market without aggravating inflation fears or yield pressures. Recently, however, good economic reports are starting to worsen inflation indicators, force bond yields higher and pressure the stock market. That is, good news is proving bad for the financial markets...
Stockmodities
Inflation concerns are mounting, and as bond yields climb, anxieties among equity investors are also rising. In the fourth quarter, for the first time in this recovery, the pace of nominal GDP growth surpassed the labor unemployment rate (UR) indicating that cost-push pressures are likely to intensify (see our report “A Nominal Event” published 1/29/2018 for more detail about this indicator). This could further exacerbate inflationary pressures and accentuate concerns surrounding a highly-valued U.S. stock market.
A Nominal Surprise?
A “nominal surprise” forcing yields higher than expected at a time when investors have priced the financial markets for an ongoing sweet spot is a primary risk in 2018. Many have become complacent about inflation risk believing the link between wages and the unemployment rate has been severed and that global disinflationary forces are much more pronounced than they have been in the past.
Should Investors Cheer or Fear a Weak U.S. Dollar?
The trade-weighted U.S. dollar index broke below 90 this morning to a fresh three-year low! This is puzzling for many as dollar weakness coincides with rising U.S. yields (i.e., the 10-year yield also recently broke to a new three-year high) which should improve its investment attractiveness.
A Valuation Mishap?
Valuations in the stock market have been high for so long that most have stopped worrying about when or if values will ever matter. Sure, they will eventually, and yeah, expensive valuations probably mean lower returns over the “long” term. But, will they really stop this market tomorrow or even yet this year?
What 10-Year Bond Yield Will Bite Stocks?
As the stock market rally continues higher and the 10-year Treasury yield nears a three-year high, investors ponder what yield level will bite stocks. Historically, the stock market has withstood much higher yields. Is a 3% bond yield a stop sign for equity investors? Or, with synchronized global growth and earnings results juiced by tax cuts, will it take a 4% or 5% 10-year bond yield before the stock market succumbs?
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