Trist budskap från Wolfe Trahan i eftermiddag, men det är väldigt lätt att ropa på vargen efter några neddagar. Jag tror avsaknad av negativa nyheter räcker för att lyfta börsen inom kort:
The list of market-based indicators arguing that a new downward trend in economic prospects is getting longer and longer. Of course, at the top of this list is the loss of momentum in equity markets over the past two months but it’s much more than that. Indeed, the majority of so-called “leading indicator” trades have or are beginning to turn as well. For instance, we’ve seen a change in sector leadership, a turn in the domestically-focused vs. foreign-exposed trade, in the style and capitalization buckets, and in asset allocation land where Treasuries are trumping stocks and credit spreads have begun to widen. All of these are consistent with a world where investors ratchet their growth expectations lower.
As we see it, calling for softer leading indicators is no longer a forecast but now a reality. Indeed, the advance/decline index of the LEIs we track was negative in the month of May for the first time in a year. Moreover, we’ve seen three LEIs released so far for the month of June, two of which headed lower (Philly Fed and Richmond Fed indices are down, Empire Manufacturing is up). Our work on series that are anticipatory of leading indicator trends is not very optimistic about the road ahead. Indeed, most of these argue this nascent deceleration in LEIs is unfortunately here to stay.
The challenge with our (and the market’s?) message is that it’s not good news for most fund managers. Indeed, rising leading indicators are consistent with strong gains in equities and a lot of fun for investors while decelerating leading indicators is often a world where relative gains, or alpha, become far more important. Moreover, the list of things that do “relatively” well in this type of backdrop is a yawner at best. Let’s face it, there is nothing exciting about Treasuries, Utilities or Staples. The best advice we can give folks at this point is to think of all the investments they find to be a bore and consider them seriously in their portfolios. If we are right on leading indicators, the “boring stuff” might just be the best investment. As always, time will tell