August 16, 2024 – Chris Puplava discusses the role corporate buybacks are playing in driving the bounce back in stocks and why we are starting to increase our exposure to emerging market bonds. Also, Chris covers the most recent economic data when it comes to retail sales, manufacturing vs. services, the jobs market and much more.
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Transcript:
Cris Sheridan:
Well, today we're going to discuss some of the mixed messages that we're seeing in the economy and globally, as well as some of the technical breadth and credit market messages. Joining us on our smart macro segment, as always, is Chris Puplava, our chief investment officer here at Financial Sense Wealth Management. So, Chris, let's start off talk about some of the mixed messages that we're seeing, particularly between the manufacturing and services sectors of the us economy and some of the other data points that you're looking at that could potentially create more volatility in the markets for the months ahead.
Chris Puplava:
That's right, Chris. I mean, we. From one week to the next, we either get a really bad jobless claims number on a Thursday or a decent one. So there's a lot of flip flopping there. Manufacturing is still pretty negative, but then you might get a positive report like what we saw with today's retail sales report on Thursday, the day you and I are speaking. So it very much is a mixed bag when you look at manufacturing. We're still in a recession. One of the things that kind of shocked a lot of people earlier this month is when we got the July ISM manufacturing index, which came in at 46.8. So that's still pretty deep into contraction territory. You get into the low forties, and that's something usually you only see in the context of a recession. Today we also got the industrial production numbers, and it was expected to fall in July. Bye. Uh, three tenths of a percent. Instead, it fell by six tenths of a percent. So twice as worse as what was expected. Uh, capacity utilization also fell from 70.5% down to 77.8. And the reason why I track capacity utilization, Chris, is that does tend to follow the unemployment rate. So a capacity utilization rate that is falling is usually associated with a rising unemployment rate and vice versa. So it does tend to support the narrative of a weakening labor backdrop, which I still think we're seeing. I mean, we're, we're not seeing massive firings yet. We're still adding jobs, but we're just not adding enough of them. The hiring is really slow down such that the amount of hiring is not keeping pace with job entrance, and that's pushing up the unemployment rate. So when we also look at continuing claims, Chris, the trend is still up. Unfortunately, you know, from week to week, it might, you know, not rise consistently, but overall, when you look at it, since I would say 2023, we've been in a rising trend. And the yield curve tends to follow the Javas claims or continuing claims. And so that's one of the reasons why, Chris, when everyone says the inversion of the yield curve is not what you used to get worried about, it does tend to predict a recession down the line. But what you really need to be careful about is when that yield curve normalizes and gets back to a positive slope. So when that's rising, that's usually associated with rising jobless claims, continuing claims, which herald a coming recession. So when we look at the yield curve, it's really steepened in the last couple of weeks here with expectations of a Fed rate cut. So just bear in mind, Chris too, most of the times when the Fed is cutting aggressively, and I say aggressively because right now the market is betting around roughly four rate cuts this year and more into next year. When the Fed is cut to that extent, over 100 basis points north of that, usually its in the context of a recession. So you kind of want to be careful what you wish for the markets hoping and betting for rate cuts. But usually the Fed obliges to that only because of where the economy is. So if we see the yield curve steepen, where the ten two yield curve is negative, about 0.18%, were not that far away from going positive. And usually that's kind of really where you start to mark the clock for when the recession starts. And we just, the one that really got everyone was the July payroll report. We got the triggering of the Som rule. So positive a sloping yield curve, a trigger of the Sahm rule, you'll start to check the boxes of a possible recession. So I wouldn't say we're out of the woods yet. I know the market's really recovered a lot of the loss that we've seen, but a lot of that, Chris, is it's not this massive, enthusiastic buying coming back in. A lot of it is from corporations themselves exiting their blackout periods after the reporting of second quarter earnings. If you think about it, especially the big tech companies, which have a massive weight in the S and P 500, a lot of them have announced big buybacks and they just had a huge opportunity to buy back their stock at much lower prices. I think a lot of this recovery we're seeing, Chris, is from the large tech companies buying back their own shares. So it's a little suspect, particularly given I wouldn't say there's a real all clear signal coming from the, from the economy. Yeah.
Cris Sheridan:
And I should note that we're speaking on Thursday, August 15. This will be airing on Friday. And given the pretty big move that we've seen in the S and P 500 today, as we're speaking, it's up one and a half percent. I believe that takes us around seven or 8% now of a rebound off the lows. So that's, that's a pretty big move. And, uh, you know, most of the guests we've had on to speak about the technical outlook so far have said that they're expecting continued volatility. Jeffrey Hirsch at stock Traders Almanac saying that we're in really the concentrated worst two months of the worst six months period going from May to October. So he's expecting that September and October are likely to be somewhat rocky and that we probably won't see a final bottom until right before the election, probably in that September October timeframe. But so far, it's just been a straight shoot up off of that bottom. So according to your analysis, a lot of that has to do with these large corporations buying back massive amounts of their stock.
Chris Puplava:
That's correct. And also I'd know, Chris, when we look at the Fed's reverse repo facility, that also has improved, where it's hitting a new low, I think a multi year low, where starting this year it was roughly around, say, 750 billion. That's now down to 287 billion. And it went sideways from, I would say about April through early July. But with August now, it broke out of that range and hit a lower low. So we're seeing some injection from the reverse repo facility. And the big one is the treasury general account at the Fed that currently stands at $812 billion. And we saw what that did back in April, where when basically that rises, that's taking money out of the system, crowding investment out. We saw a decline in April in the stock market, and it went from about 950 billion at the start of May. It plummeted to about, let's say, 650 billion by mid June. That helped to fuel the stock market. So resting at 812 billion, there's a lot of potential firepower that could go into the market or into the economy and push things along. That was a huge factor, in my opinion. Chris, in 2021 to the stock markets rally. Back then, we had the TGA at about 1.6 trillion starting the year in 21, and that fell to about zero a year later. So that was a massive injection of liquidity into the financial markets and economy that pushed the stock market up. 2021 was a great year for the stock market, followed by the bear market of 22. And in 22, the treasury had to replenish its coffers from zero to basically a trillion. And that move literally coalesced with the peak in the stock market late 21 to early 22 into the first part of, I would say, may of that year. However, once they were refilled, they quickly went from a trillion dollars in, I would say, about May of 22 to back to zero by the summer of 2023. So that helped to, I think, turn the market around, turn the economy around and reaccelerate it going into 2023. So 812 billion. That's a lot of money. And if the treasury starts to lean on the market by pushing that into the economy, that could keep things looking pretty rosy heading into the elections.
Cris Sheridan:
So, Chris, with this recent pullback that we've seen, what's your general take on where things now stand? As I mentioned, a number of our guests on fs insider are expecting continued volatility over the next month or two. Large part of that having to do with seasonal factors and some other technical measures. What are you seeing from your end in terms of the sustainability of this strong rebound so far?
Chris Puplava:
I would agree with that view, Chris. One of the things that I noted just before this market pullback was we got a ton of Hindenburg omens. And that's basically those are flagged when the markets have an identity crisis. So if you're in a bull market, you should have tons of stocks hitting one year highs or 52 week highs. If you're in a bear market, you should have the majority of stocks hitting 52 week lows. But when you're in a bull market and you're seeing both new highs and new lows, that's something that you typically don't see. That could be a market in transition going from a bull to a bear. Conversely, if you've got a bear market in place and you see a bunch of 52 week lows and new highs, that could be a market transitioning from a bear to a bull. So the fact that we got Hindenburg almonds on the Russell 2000 small cap index, the S and P 400 mid cap, the S and P 500 large captain and tons on the Nasdaq do show a lot of concern heading into that market peak, where, yes, there are some really big cap stocks hitting new highs, but there's also a lot of stocks hitting new lows. So one of the things I'm keeping an eye on is looking at market breadth to get an idea of, okay, was that just a correction? We're going to be off to new highs. One is I'm looking at percent of stocks in the S and P 500 above their 50 day moving average. And over the last year, the high was actually set in the beginning part of the year, where we hit north of 90% of stocks were above their 50 day moving average in January, February, and subsequently with the April high, that fell to about 85%. And in the recent July peak, that was down to about 75 77%. So we are seeing some weakening in overall participation in this rally. Currently, right now, we're at about 59%. Let's just call that 60. And we've retraced a lot of that decline from last week. If we continue to march higher, and I'm not seeing this get to 70, 80%, that would be a warning sign, Chris, that it's really being driven by the large cap tech companies that are.
Cris Sheridan:
Pushing the index higher outside of the equity markets. In specific, I know that you also review a large number of currencies. You also look at the fixed income, the bond market, credit markets as well, to give a good sense in terms of financial stress measures and the sustainability of current advances, or when we're stretch on the extreme to the upside or the downside. And if that's confirming the stock market, what are you seeing when you look at the credit markets, currency markets, or some of those other fronts?
Chris Puplava:
Well, the one that I like the best, whenever there's some confusion as to the market's direction, is the credit markets, because there's a lot less emotion in the credit markets, Chris, a lot less fear and greed and more rational investing. There's more sophisticated investors there. And whenever there's a divergence between the two or conflicting messages, I tend to err on the side of the credit markets, because more often not, they get it right. It's the market, the stock market, that comes to their viewpoint. Good example of this. I mentioned we had a pretty significant market peak, late 2021, a mini bear market in 22. And what I noticed was, and I don't look at credit spreads per se, Chris, because I think that could be influenced by the Fed in terms of its quantitative tightening or easing. So rather than looking at credit spreads or basically what corporate bond yields are doing relative to treasury bond yields, I like to look at credit default swaps. Thats basically what are the odds of default that the market is betting for, whether its investment grade, corporate bonds or junk bonds. And what I was noticing was beginning September of 21, I was starting to see default swaps for corporate bonds start to rise. And those should move inversely with the stock market. So if the stock markets hitting new highs, you should see default swaps hit getting new lows. And instead I was seeing the opposite, that they were actually starting to rise. That was a little bit of a hint of some trouble to come in 2021. The other thing I really look for with credit default swaps is when were in a bearish trend and the market recovers and rallies. Do I see a recovery in credit default swaps? For example, in March of 22, we had a pretty significant correction. Most people were still convinced that that's all it was was a correction, that the bull market was heading for new highs and the market had a pretty good rally and retraced I would say almost 75% of the decline up to that point. Well, the credit markets, the recovery was very much muted compared to what we saw in the stock market. And that to me was a hint that this was just a dead cap bounce. Further, the ultimate bottom was set in October of 22. But the credit default swaps, they actually showed a peak in September. So more than a month in advance of what we saw in the stock market. So default swaps started to come in as there's less default risk being priced in the market before the market even itself bottomed. So that was giving the idea of how they performed before the last major top and the bottom in 21 and 22. When we look at things currently, Chris, they more or less confirmed what we saw in July where the market hit a new high. Credit spreads or default swaps, I mean, were pretty much near their lows. And so far we've had a pretty good recovery in the stock market. I think we've retraced more than half of the decline and I've seen a similar recovery in credit default swap. So, so far, that tells me that this recovery is real, it's tangible, there could be some more legs to it. So I'm not seeing any signs that, you know, we finished the first leg lower and we're about to hit a new low. Now, we could retest the bottom, but taking those out, given the recovery I'm seeing in credit default swaps, I would say the bottom near term is probably in and we're unlikely to breach those lows that we saw last week. So based on the message of the credit markets, I'm not really seeing any widespread signs of stress at this moment. So that's why I think it's a little bit too early for the bears to declare victory. And I think we have to be cognizant of the fact that there could still be some upside to the market.
Cris Sheridan:
Okay, so given what we're seeing in the credit markets, like you said, that is confirming the current advance that we're seeing. There's no big divergence there, which is something that would signal that perhaps we're going to turn lower or could even breach the lows that we saw. We're not seeing that currently. So given some of the things that you mentioned already, when it comes to the mixed messages that we see between the various sectors of the us economy, some of the other items that you discussed, what is your expectation for the us stock market? I think you had said you're lining up with this idea that we should expect to see more volatility. Of course, we did just recently speak with Craig Johnson. He has upped his year end target to 5800 on the s and P 500. So he's expecting higher highs at the end of this year at least. But we do have a number of uncertainties to get through before the November election. So how do you think things will proceed over the months ahead?
Chris Puplava:
Well, we went through already some of the key hurdles for the month. We got the jobs report out of the way. We got PPI and CPI out, and I think it will be relatively small. We'll get different reports, whether on housing or the Fed's preferred measure piece ahead. But the big ones are always the CPI and jobs. So I think we're pretty clear there. We'll get the Fed's Jackson Hole symposium meeting next week. I don't really expect fireworks. I think Powell pretty much stay descript to me. Really. I think all eyes are going to boil down to the August payrolls, which we'll get in the first Friday of September. Now the question will be, does the unemployment rate tick up even further? Was that a temporary blip? Does it moderate? So to me, I think everything will really be keyed on that next jobs report. And that actually should set the tone for the September Fed meeting. If it's another negative jobs report that comes in below expectations, then I think it's a foregone conclusion. The Fed's not going to cut 25 basis points in September. It'll likely cut 50 basis points. As of right now, the odds of a 50 basis point cut are only 27%. So basically near certainty for a cut, but only 27% chance of having a 50 basis point cut. And when we look at what the markets pricing in for the remainder of the year between now and the end of the year, the market is giving basically the odds of three rate cuts so far, almost four rate cuts. I mean the odds of four rate cuts is about 27%. Near certainty for three, about 27 for four. So I think a lot of this question I've talked about a mixed message in the economy. There's clearly some positive things to look at, a lot of negative things to look at and point to as well. So there's plenty of fodder for either the bears or the bulls, but it's the incoming data that's really going to be scrutinized to see, okay, well who's really winning? And so I think the market will likely remain calm over the next couple of weeks going into that report. As I mentioned, corporate buybacks are pretty strong coming off of the end of the blackout period there and I think those will continue to push the market upward slightly. But I think the real key will be what happens with that jobs report. So you saw what happened today with the market. The retail sales report came out. Doesn't look like the consumer is running into recession right now. The market rallied. If we get a decent jobs report that shows yes, the us economy is slowing but its not falling into recession, then I think the market will rally. But if we get another negative print then I think the markets really start to get concerned that, you know what, the Fed may be behind the curve. We might need more aggressive rate cutting by the Fed to stave off a recession and stock market could sell off on that. Basically the outlook is murky for stocks but I think its pretty bullish for bonds. So think of it this way. Were not talking about if the Fed is cutting what were debating is by how much. So in general falling interest rates are bullish for bonds. As interest rates fall, bond prices go up. So if we have a soft landing slowdown bond should do well. If we have a recession in which interest rates fall aggressively then bonds should have a pretty good bid to them and do really well, particularly those without credit risk such as treasuries. Junk bonds obviously would get hurt and investment grade bonds could get hurt depending on what the markets pricing for default risk. But in general I think were in a win win scenario for bonds right now and for that reason Chris, its why were extending the duration a little bit on our client portfolios. Were not going into long term treasuries. I'm very so much concerned about the supply there coming out of the us government. And further what happens if the US falls in recession, tax receipts fall and expenditures rise. So we could have even a bigger deficit and more supply of US treasury. So we're staying keeping our cards close to our chest. In terms of maturities. We did extend it to some extent but we're still below our benchmarks duration or maturities profile. So we are bullish on bonds in particular, we have started to dip our toes into emerging market bonds, given that the US Fed is likely to cut and play catch up with the rest of the world, particularly emerging market central banks who already have been cutting. And so when you think about, Chris, the rest of the world is cutting and the US is not. And the dollar has not exactly been strong. So you can only imagine what the dollar is going to do once the Fed does start to cut, particularly if it cuts aggressively. So we do think there's some opportunity there for some currency appreciation by going into foreign currency bonds, particularly in emerging markets where they've already raised rates aggressively to combat inflation, and they're well ahead of us in terms of that interest rate cycle.
Cris Sheridan:
So, as you mentioned, given your outlook and some of the things that were looking at with the us economy and the financial system, the safest bet, as you see it, is to extend duration slightly on the fixed income side, locking in higher yields. Thats something that you had mentioned with us in the past month or two that we began doing, and then also increasing exposure to emerging market debt. And I think that that's a very interesting strategy here, because, as you mentioned, when it comes to the US dollar, this was something that Mark Chandler, the well known currency strategist at Bannockburn Global Forex, recently mentioned on our FS Insider show, talking about that he is anticipating and now calling for a multi year decline in the dollar. And a large part of that has to do, like you mentioned, with the Fed shifting to an easier policy and the policy mix now favoring a bearish trend in the dollar. So that's what he's calling for. And if that does take place, if we do start to see the dollar trend lower over the next couple of years, then that should benefit emerging market debt exposures.
Chris Puplava:
Historically, it has you kind of get basically a twofer where falling interest rates benefit the bonds in the fact that they're in foreign currencies, falling dollar benefits that as well. So it's something that can do really well if well timed well.
Cris Sheridan:
Chris, thanks for coming on to our smart macro segment, giving us an update again on your outlook and what we're doing here at financial cents wealth management. If any of our listeners would like to get in touch with you regarding our investment services, either with financial planning or, or on the asset management, money management side, what would be the best way to reach out to you and talk about some of the things that we're doing here?
Chris Puplava:
They can reach me on, at our phone at 888-486-3939 or they can shoot me an email at chris[dot]puplava[at]financialsense[dot]com.
Cris Sheridan:
After we recorded the show, consumer sentiment came out today on Friday, edging out a slight gain. But according to the breakdown of the data, most of the gains came from Democrats. Joanne Hsu, the director of the survey, said that consumer sentiment surveys are largely going to be reflecting the polls over the next couple of months and how both Democrats and Republicans feel depending on which candidate is in the lead. Carl Weinberg, the chief economist at high frequency economics, noted that "consumers are still pretty glum overall by historical standards, but sentiment is on an improving trend." One of the top concerns still keeping consumers sour on the outlook is inflation. And even though the official consumer price index has now dropped below 3%, price levels are not coming down. They're just rising at a slightly slower rate, with price levels still at very high levels. This is a top concern among voters, and Trump has made inflation one of the main items he's discussing during campaign rallies. In response, Harris has now announced just today that if elected president, she will implement federal price controls, especially on food and groceries. Economists debate whether this will actually help to bring down inflation, and many cite the 1970s as a period of time in which this was tried but ultimately proved ineffective. We've cited the large number of parallels between the 1970s and today in prior podcasts, high inflation, war in the Middle east, college protests, and even a major hostage crisis. But if Harris wins, we can also add price controls to that list. It didn't work before, but who knows? Maybe this time is different.
