Author: Doug Wilde (Page 1 of 5)

WCM Chart of the Week for November 30, 2020

Beyond the rosy headlines of a strong economic recovery and a rally of over 40% in the Shanghai Shenzhen CSI 300 Index from the depths of the pandemic, trouble may be brewing in China’s bond markets. Total debt in China was approaching 325% of GDP in 2019, a point that economies generally struggle. The largest segment of total debt growth from 2018 to 2019 was in the corporate sector, which rose from 165% to 205% of GDP. China’s 2019 corporate debt binge appears to have hit a wall. According to Chinese media reports as much as 69% of private enterprises have defaulted on their outstanding loans so far in 2020 and the festering crisis may impact local governments and state enterprises as well. Further deterioration in the Chinese financial system would obviously have negative implications for the rest of the world.

WCM Chart of the Week for November 23, 2020

Trade flow in Asia is maintaining momentum after rebounding from the pandemic-caused low in February. Container traffic in Singapore has recently reached an all-time high level which many see as a proxy for trade in the region (or even the world) given its unique geographical location and distribution capacity. Improving economic trends in the region are also reflected in stock prices.  The MSCI Asia Pacific Index, which includes both developed and emerging equity markets, is leading global equities. The total return of the index is up 13.4% compared to the 9.5% return for FTSE All Cap Global Index so far this year through November 20, 2020. We view this as potentially a good omen for global equities because it may signal that the equity rally is broadening beyond the US. [data courtesy Maritime & Port Authority of Singapore, MSCI; chart courtesy Bloomberg LP © 2020]

WCM Chart of the Week for November 16, 2020

With US stock market indices across the capitalization spectrum at or above all-time highs, US Treasury yields have been grinding higher. Since early August, the yield on the benchmark 10-year Treasury has risen from an all-time low of 0.51% to 0.9%, forcing long-term US Treasury prices down over 7% since then according to the Bloomberg Barclays Long Term US Treasury Price Index. US stock prices have been rallying due to the announcements of highly effective COVID-19 vaccine trials, building economic momentum, clarity developing in the US political landscape and resilient as well as improving corporate fundamentals. We expect US interest rates will continue to normalize to pre-pandemic levels in coming quarters and that will likely keep downward price pressure on long term Treasuries. We expect this to be gradual given that comparable sovereign rates in Europe and Asia remain much lower or even negative. Overall conditions should be supportive for equities heading into 2021 even in the face of higher US Treasury yields. [chart courtesy Bloomberg LP © 2020]

WCM Chart of the Week for November 9, 2020

US equity markets have rallied strongly in the days following the national elections. According to Bloomberg, the S&P 500 delivered its largest day-after-election gain in history — 2.2%. This may seem perplexing because the outcome of the presidential election and even some congressional seats are yet to be finalized and markets generally fear uncertainty. It appears that Democrats will maintain control of the House of Representatives and the Senate will remain under Republican leadership while both majorities will likely be less dominant. The Electoral College does not cast its 538 votes until the first Monday following the second Wednesday in December (Dec. 14, 2020), and a lot of work is yet to be done and lawsuits to be filed in battle ground states between now and then. In light of the political uncertainty the positive tone in US equity markets can be explained by several factors. 

First, the balance in Congress is likely to lead to no drastic change in US tax rates as any proposed increase would stall in the Senate. The same would likely result from any major proposed change to US energy policy. Markets generally respond favorably to policy certainty, or at least stability. Second, another round of stimulus will likely be delivered at some point before the end of the year. This tranche of spending or relief will likely be more targeted to the areas of the economy most impacted by the deadly effects of COVID-19. Meanwhile the Fed will remain accommodative.  Markets thrive with generous stimulus. Third, the US economy is rapidly recovering.  As many expected, the US economy rebounded strongly in the third quarter, exceeding economists’ forecasts. The BEA reported GDP grew at a 33.1% annualized rate while the consensus estimates stood at 32.0% prior to the announcement. Finally, the labor market continues to improve with October employment posted as a +638,000 change in payrolls and unemployment falling to 6.9%, both better than consensus expectations.

WCM Chart of the Week for November 2, 2020

As many expected, the US economy rebounded strongly in the third quarter exceeding economists’ forecasts. The BEA reported GDP grew at a 33.1% annualized rate while the consensus estimates stood at 32.0% prior to the announcement. The rebound is quite welcomed in the wake of Q1 and Q2 contractions of 5.0% and 31.4% respectively. Strength was delivered across nearly all key sectors of the economy with the exception of Government Spending. Personal Consumption Expenditures, the largest segment of the economy, grew 40.7% (annualized) in Q3, highlighted by an 82.2% advance in Durable Goods. Gross Domestic Private Investment expanded at an 83% clip.  Exports and Imports also rebounded impressively. The recovery appears to be underway and the recent report is headline grabbing, but the level of GDP is still some 2.8% lower than at this point last year. The key to the trajectory going forward is in state and local lock downs which are lifted or reinstituted as confirmed COVID-19 cases are peaking across the nation. This introduces major uncertainty which, along with the lack of additional stimulus spending, have caused capital markets to become more volatile over the past several trading days. Stay tuned. We will.

WCM Chart of the Week for October 26, 2020

Over the past decade or more, Europe has endured several painful crises spanning Euro-related stresses to the recent Brexit uncertainty.  The common thread retarding recoveries from these epochal events has been the lack of coordinated policy response, in particular fiscal stimulus. The European Union, now with the UK removed, simply does not have the strength to influence its member states to expand fiscal spending that would benefit the region beyond each country’s own national borders. Now the global Coronavirus pandemic is accelerating to frightening levels across Europe as evidenced by case momentum. The imprint on European stock prices is telling.  From the onset of the pandemic, the broad-based EuroStoxx 600 is over 8% lower in US dollar terms and has been range trading since early June. By contrast, The S&P 500 is flirting with all-time highs. We believe the difference is that, while Europe has generally been more aggressive in the public health response to the pandemic, the overwhelming US fiscal and monetary response carries the day as compared to the apparent EU policy vacuum.

WCM Chart of the Week for October 5, 2020

Over the past several weeks, credit spreads in US Investment Grade and High Yield bonds have risen while US equity prices hover near key support levels established since the S&P 500 and Nasdaq Composite indexes posted record highs in early September. Some consolidation in equities can be justified given the rapid recovery from the pandemic-induced lows reached in late March. The bond market appears to be sensing heightened risk. Credit spreads fell a considerable amount since the late-March spike but remain elevated compared to pre-pandemic levels and are on the rise even considering the modest tightening this past week. The yield on the 10-year US Treasury has been relatively stable since the beginning of September, fluctuating 5-10 basis points, and the US Federal Reserve remains in hyper-accommodative mode implying that the rising price of money for US corporate creditors is the main driver of widening spreads. This trend suggests that there may be further volatility ahead for US corporate securities. [chart courtesy Bloomberg LP (c) 2020]

WCM Chart of the Week for September 21, 2020

This week’s chart appeared in the Wall Street Journal via Germany’s Kiel Institute for the World Economy and shows the rapid rebound in global trade after the pandemic-induced economic stall.  As the Journal points out, World trade volume has regained half of the volume lost since the COVID-19 outbreak in three months whereas it took nearly 12 months for world trade to regain a similar drop in volume in the aftermath of the global financial crisis. While the rebound is not consistent across the globe, it is an encouraging sign that commerce is returning to normal.

What we find notable is the speed of the recovery in trade volume and consistency with our comments last week regarding the fast pace of US jobs re-creation. The causal nature of this recession was highly unusual, near universal global government-led economic lock-down, so it is not all that surprising that the recovery could be quicker than normal.  Several factors could disrupt the recovery including a potential second wave of viral infections, lack of an effective vaccine or therapeutics, and ongoing trade tensions.  But, improving macroeconomic trends are welcomed worldwide.

WCM Chart of the Week for September 11, 2020

August’s labor market statistics were encouraging and suggest that the US economic recovery is far from normal. According to the BLS, Nonfarm Payrolls expanded 1.37 million in August, slightly above expectations, and the unemployment rate dropped by more than expected to 8.4% versus consensus expectations of 9.8%. While the number of unemployed dropped by 2.8 million, there are still 13.6 million Americans out of a job, which is 7.8 million more than in February.  The nature of the recession, which appears to be largely behind us, is like none ever experienced because it was government induced nearly worldwide. Governments across the globe intentionally suppressed economic activity rather than act in their normal supportive role. Recessions are often caused by structural imbalances such as excess leverage in the financial sector, over-accommodative monetary policy causing hyper-extended stock market valuations, overvalued currencies and commodity price shocks.  These types of imbalances did not exist in the US for the most part prior to the pandemic and that may have set the conditions for a faster recovery. One dramatic example — over 10 million jobs have been recovered since April. By comparison, it took 54 months, from October 2010 to March 2015, for an equivalent number of jobs to be recreated in the aftermath of the Financial Crisis. [data from the US Bureau of Labor Statistics]

WCM Chart of the Week for August 28, 2020

The US stock market continues to rebound from the pandemic panic-driven lows, with the NASDAQ and S&P 500 continuing to post new all-time highs over the past several weeks. This is prompting investors to question if the current rally can last, or even if it marks the beginning of a new bull market.  There are risks that could derail the stock market’s advance ranging from tensions with China, resurging virus hot spots, social upheaval around the country, and the upcoming national elections. The US labor market is also a persistent drag and will not likely have recovered until well into 2021.

There are several factors that are supportive of asset prices including unprecedented fiscal and monetary support, and mounting positive momentum in key economic sectors such as manufacturing, housing and the consumer.  As previously mentioned in our COTWs, in the US personal savings rates remain elevated and personal balance sheets have been de-levered, suggesting the consumer has the ability to spend if they wish.  This week’s chart highlights total assets in money market funds, which remain near peak levels suggesting private investors have been underexposed to equities during the stock market’s historic recovery rally.  This is a condition many cite as additional evidence that equities could continue to advance higher in the months ahead. [chart courtesy Bloomberg LP © 2020]

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