posted on 08 November 2015
by Jeff Miller, A Dash of Insight
Friday's employment report, rightly or wrongly, confirmed expectations for a December shift in Fed policy. There will be a parade of Fed speakers. We can expect daily discussion about the implications. The punditry will be asking:
What will higher rates mean for financial markets?
Prior Theme Recap
In my last WTWA (two weeks ago) I predicted that the market story would focus on the FOMC and a possible change in policy. This was a good guess about the recurrent theme, although there have also been plenty of big earnings stories. To get the full story, let us look at Doug Short's weekly chart. Doug's full post discusses the muted effect of Friday's strong payroll report. (With the ever-increasing effects from foreign markets, you should also add Doug's World Markets Weekend Update to your reading list).
Doug's update also provides multi-year context. See his full post for more excellent charts and analysis.
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.
This Week's Theme
The economic calendar is modest and earnings season is winding down. The entire market mood shifted with the employment report. A 2015 rate hike that seemed very unlikely two weeks ago has now become the conventional wisdom. Markets made a quick adjustment on Friday, but is there more to come? Providing some help (??) we will have a weeklong series of speeches from Fed Governors and Presidents.
There will be many opportunities to opine on Fed policy and the consequences. Everyone will be asking:
What will higher rates mean for the markets?
Let's divide this into two themes - the overall impact and specific markets.
There are sources taking each of these positions. I expect it to be fiercely debated in the week ahead.
As always, I have my own ideas, reported in today's conclusion. But first, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
The news of the week was mostly good.
There was some negative news as well.
Complex, high-commission investment products. There are two in the news this week. Either might be suitable in the right circumstances, but sadly, that is not how they are often marketed.
Sen. Elizabeth Warren issued a report on conflicts of interest in annuity sales. Slate has a summary of the concerns, describing both the high commissions and additional perks for those selling.
At the heart of the controversy is a public expectation of a fiduciary interest on the part of the sales rep.
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger. No award this week, despite the abundance of really bad analysis. I am thinking of starting a nominee section. This would include items that have obvious errors but which have not attracted any replies or refutation. Almost any two-variable chart these days is a candidate.
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here.
Recent Expert Commentary on Recession Odds and Market Trends
Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured "C Score."
Georg Vrba: An array of interesting systems. Check out his site for the full story. We especially like hisunemployment rate recession indicator, confirming that there is no recession signal. He gets a similar result from the Business Cycle Indicator, updated this week.
Doug Short: Provides an array of important economic updates including the best charts around. One of these is monitoring the ECRI's business cycle analysis, as his associate Jill Mislinski does in this week's update. The ECRI story is becoming repetitive and even more unhelpful. It seems too related to commodity prices, and only slightly changed from their failed recession forecast. It would be refreshing to see them do a complete reset and adopt a fresh approach.
RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. While we feature the recession analysis, Dwaine also has a number of interesting systems. These include approaches helpful in both economic and market timing. He has been very accurate in helping people to stay on the right side of the market.
This week Dwaine highlights a recession "warning" (next September) from his proprietary indicators. Since these have not yet been tested in real time, he recommends a watchful approach before making an official forecast. Read the entire story here.
New Deal Democrat updates a number of long-leading indicators, suggesting no recession before next year's election. See the full post for analysis.
It is time for another update of Doug Short's excellent Big Four series, where he tracks the most important indicators used by the NBER in recession dating. Check out the full post for detailed analysis of each component.
The Week Ahead
It is a moderate week for economic data. While I highlight the most important items, you can get an excellent comprehensive listing at Investing.com. You can filter for country, type of report, and other factors.
The "A List" includes the following:
The "B List" includes the following:
This may be a record week for FedSpeak with at least one person taking a rostrum every day. Expect each appearance to be parsed for a validation of the new expectation of a December rate hike.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a "one size fits all" approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
Insight for Traders
Felix has remained bullish, and we increased our commitment accordingly. The penalty box indicator remains relatively low, increasing our confidence in the multi-week bullish call. For more information, I have posted a further description - Meet Felix and Oscar. You can sign up for Felix's weekly ratings updates via email to etf at newarc dot com. Felix appears almost every day at Scutify (follow him here).
Dr. Brett Steenbarger continues to "bring it" for traders - post after post. This week he has two great articles. One shares his experience in hiring traders for prop firms and hedge funds. He notes two important predictors of success: originality and flexibility.
In the second he emphasizes the importance of intuition - when it works, and when it doesn't. This counters some recent stories about experts, but I think it is correct and deserving of more study.
Insight for Investors
I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. Major market declines occur after business cycle peaks, sparked by severely declining earnings. Our methods are focused on limiting this risk. Start with our Tips for Individual Investors and follow the links.
We also have a page summarizing many of the current investor fears. If you read something scary, this is a good place to do some fact checking.
Here is our collection of great investor advice for this week.
If I had to pick a single most important article, it would be the KraneShares post, A Tale of Two Chinas. The story of China weakness, with overemphasis on manufacturing, has diminished over the last few weeks. Partly this is because more seem to understand the implications of the changing emphasis in the Chinese economy. This has been crucial in the shift in investor attitudes about the global economy and recession odds.
See the full article for charts and more details.
Chuck Carnevale's most recent post for retirement investors is valuable for everyone. He highlights attractive undervalued stocks in the defense sector, attractive and less attractive names in health care, and explains the need for patience when taking a value approach. There are plenty of ideas, charts, and great explanations.
Jack Hough at Barrons.com has some ideas for cheap alternatives to the market-leading FANG stocks. We own two of the three.
Watch out for....
Hedge funds - - most not doing well. (Eqira).
Bitcoin - Jamie Dimon says that governments will crack down. (Fortune)
Professional investors and traders have been making Abnormal Returns a daily stop for ten year. The average investor should make time (even if not able to read every day as I do) for a weekly trip on Wednesday. Tadas always has first-rate links for investors in this special edition. As always, there are several great links, but I especially liked this explanation of why you should keep stock market apps off your phone. Hint: Frequent monitoring is likely to reduce your performance via "myopic loss aversion."
There is a reason why brokerage firms make trading easy and accessible. And you are not really going to get a visit from Kevin Spacey.
Are you a baby boomer? Kate Davidson at the WSJ has a good explanation of the savings gap facing potential retirees. This chart tells the basic story.
Eddy Elfenbein comments on the continuing lag in the value investing approach. With a bow to some academic opinion, he suggests that a lingering 2008 effect on financial index may be spilling over to many of these names. If so, a rising interest rate regime may be positive for these names.
Alpha Architect takes up a similar theme, citing (as usual) some good academic work and concrete examples. Hint: In the long run, three years of lagging performance from a strong method means little. For investor, especially those getting older, it causes them to lose confidence.
Neil Irwin (The Upshot at the NYT) conducts an interesting debate - with himself! He raises and responds to the important current economic arguments. He acknowledges and responds to the key worries. Whether you agree or not, it is a good summary of the issues.
Cullen Roche opines that the bull market is built upon fears of another financial crisis:
Callum Thomas charts the story.
Friday's trading provides some clues to the likely reaction of various markets. Here are my (tentative) conclusions.
But we should not get carried away. There were significant market reactions on Friday, and the path of increases is likely to be long and shallow. There is plenty of time to adjust positions.
Two weeks ago I stated my contrarian opinion that a December policy shift was still possible, but not important for long-term investors. I expected more of a knee-jerk negative reaction, but the market seems to have been prepared.
Rates will increase gradually and in line with economic strength. This suggests banks (I prefer the regional banks versus money center names), technology stocks with reasonable growth, and cyclical stocks priced as if a recession is imminent. Homebuilders will eventually be affected by higher rates, but the prices allow plenty of room to run.
We own stocks in all of these sectors.
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