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Macro Update


Update of mid year Macro Data and Market Indicators.


  • The US economy continues to do well with US - China trade negotiations recently restarted.
    1. Consumer sentiment was 98.2 in June vs. an 86.6 historic average.
    2. The US consumer was still buying through May. YTD May retail sales are up 3.2% YoY.
    3. The Bureau of Labor Statistics reported the economy continues to add jobs; thus far in 2019 by an average 153,000 per month.Source: Bureau of Labor Statistics
  • The Powell Put Is In. Back in January the Chairman of the Federal Reserve, Jerome Powell, gave a prepared statement which signalled not only a pause in interest rate hikes, but also if necessary a halt to their balance sheet runoff. Later in March on 60 minutes he reiterated that policy was appropriate and he saw no hurry to change it. Recently many pundits think a supportive rate cut more a question of when than if. While I disagree with this conclusion, thinking the economy might be strong enough that a rate cut isn't necessary, I do concur Mr. Powell how our backs. Were it not so unpopular to say anything is going well under the current administration, I suspect "Goldilocks economy", not to hot, not to cold, just right, would be a common phrase in our media lexicon.

Negotiations on the US-China Tariff War collapsed as the President accused China of reneging on previously agreed terms, and threatened to raise tariffs further in response. Recently however that threat has been dropped in return for China's promise to significantly up its agricultural imports from the US. It seems threats and "playing hardball" are a normal part of many negotiations. The US has just never been willing to go there in the past despite having less (from a financial point of view), to lose in these negotiations than China does.

According to this article, had the President actually put a 25% tariff on all imports from China the effect would be equivalent to raising our average tax rate from from 26.9% to 27.5% of GDP. Additionally, Chinese exports to the US represent a much bigger percentage of China's economy than do US exports to China so retaliatory tariffs by China are not something to cause significant fear in the US. China is clearly much more hurt by a MAD (Mutually Assured Destruction) trade war than the US is, leaving the US in a relatively strong negotiating position economically.

However, China's does have political negotiating strength. China has reason to figure it will have more luck negotiating with the next administration. Previous months of "progress" in the negotiation may in fact have been no more than a delaying tactic by the Chinese. Put simply, to the extent the President may be impeached or lose the election, China has reason to believe new leadership will find it more politically expedient to roll over and play dead for them on trade. There is precedent, we've been doing so for decades under both Democrat and Republican leadership. Prior leaders were always more concerned with getting their party re-elected, and thus sought to "not rock the boat" rather than go into a major election cycle with a negative trade publicity overhang and its resulting economic drag.

Market Indicators:

The Market indicators I follow are currently mixed:

One negative indicator is a very common situation. A situation where I typically make no changes to my investing strategy, proceeding as usual.

The first three measures are probably self explanatory or can be easily looked up on the internet. The final one however, Investor Euphoria, is a lesser known psychological measurement rather than a financial one. Basically we know non-CFK members -- funds, ETFs, most individual investors, etc.-- tend to be S&P 500 followers. Thus, when the S&P 500 has achieved a new high sometime over the last 99 trading sessions they feel good about being in the market and there's ongoing pressure to stay in it. If however that positive "recent high" pressure doesn't exist, the natural tendency to act on whatever the key fear of the day tends to exert more influence (there's always a key fear of the day). The Investor Euphoria indicator thus goes bearish if the S&P500 hasn't seen a new high in the last 99 trading sessions. It does this because it's more likely indexers and closet indexers fear of the day will cause them to turn risk off.

All four of these measures have been backtested with positive result, usually improving risk vs. return if not improvement in the actual average return. When one measure is bearish, I typically do nothing (unless it's a yield inversion which I tend to weight more heavily). When two are bearish I pretty much stop buying equities, and let the cash from dividend stocks build. When three or more indicators are bullish I actively look for things to sell. Three of the four indicators turning bearish doesn't happen very often, maybe three times since the Great Recession. The infrequency of an overall bearish signal is actually a major benefit, it keeps you in the market most of the time.

In my experience there will always be something to fear in the market. This something is usually exacerbated by the media who find fear a better way to capture ratings than greed. However, if the above mathematically defined indicators don't indicate I should be bearish, I stay long. Anecdotally, these indicators have also managed to get me out of the worst of significant downturns a couple of times, albeit nowhere near highs.  To be clear, historically one still loses money using these indicators, just less than the market does during major downturns. Basically the goal of the indicators is to help shave a bit off the worst downturns while keeping us invested most of the time.


Let me know if you find this Macro update useful in the comment section below.  If there is enough interest, I can make it a regular blog feature.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.