Global Assets - Stocks Fell Slightly On Thursday

Finally, investors had enough of the bad data and weak earnings estimates on Thursday. 

S&P 500 fell 0.35%, Nasdaq fell 0.39%, and Russell 2000 fell 0.39%. Best 2 sectors were the utilities and consumer staples as they increased by 0.75% and 0.28%. 

Consumer staples sector will be hit hard on Friday by the crash in Kraft Heinz stock. The company missed earnings and was subpoenaed by the SEC because of its accounting practices. Its stock fell 20.63% after hours. 

Worst 2 sectors were energy and healthcare which fell 1.55% and 0.88%. The American stock market isn’t the only one that’s overbought. 

As you can see from the chart below, after a terrible year in 2018 where the lowest percentage of global assets increased since 2008, 2019 has been amazing.98% of global assets are up which is the most since 2009.

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Global Assets - Terrible Economic Reports But Claims Fall

The list below reviews the economic data that came out on Thursday. 6 of the 8 reports missed estimates. This a more detailed look than the Citi economic surprise index. 

It’s notable that some of the hard data from December is still coming out because of the government shutdown. That makes the index slightly less relevant as traders are focused on how February’s economy was.

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As the list above shows, the jobless claims report was one of two reports which beat estimates on Thursday. 

This is very important because initial claims had been trending in the wrong direction in the past 3 weeks. That’s shown by the 4 week moving average increasing from 231,750 to 235,750. 

In the week of February 16th, claims were 216,000 which is a decline of 23,000 from the previous week.

If claims stay near here, it will remove all fear that there will be a recession in the 1st half of 2019. 

Bears are excited that the 4 week moving average bottomed in September. But a bottom is meaningless if the average doesn’t increase. The average increased this week because the report showing 200,000 claims, which was the cycle low, came out of the average. 

This week’s jobless claims report was the sample week for the February employment report. Claims picked a great week to plummet. Last month’s sample week had the cycle low jobless claims, which explains why it was so great. 

Even with this 16,000 increase, I expect a good BLS report to come out. I expect above 150,000 jobs to have been created.  

Global Assets - Falling EPS Estimates

Earnings estimates have slowed their plummet which is great news. 

However, it’s not good enough to justify stocks rising hyperbolically as they have because there’s not much margin for error. 

Specifically, earnings estimates can’t fall much further or else growth will be negative. This is a Goldilocks earnings update. Growth isn’t hot enough to justify the current rate of gains. But it’s not cool enough to guarantee an earnings recession, let alone a bear market.

As you can see from the table below, the estimate decline pace has slowed as I predicted because earnings season is almost over. 

There isn’t much more bad guidance to push estimates lower. From February 14th to February 21st, estimates for Q1 EPS growth only fell from 0.85% to 0.59%. I’m very certain the Earning Scout estimates will join FactSet in showing declines in Q1. But with estimate beats, there might be very low single-digit growth. 

Estimates for Q2 only fell from 2.77% to 2.48% this month. If growth is positive in Q2, the earnings recession thesis is over because growth will be positive in Q4 unless there is a recession as estimates are for 10.71% growth.

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Global Assets - Slight Change To Fed Analysis

In a recent article on the Fed Minutes, I stated the Fed was going to end the balance sheet unwind in 2019. The Fed only said it would update us on the unwind soon and that the plans will be revealed by the end of the year. 

Goldman Sachs expects the unwind to end in Q3 2019, but it’s possible the unwind continues into 2020 like I originally expected. 

There are numerous ways the Fed can end QT. I could see the Fed slowing the balance sheet reduction gradually starting in the 2nd half of 2019 and ending it fully in the 1st half of 2020.

The chart below reviews how the Fed reacted to the last economic slowdown from 2015 to 2016. 

As you can see, the chart shows the ECB bailed out the Fed as earnings estimates were crashing prior to the ECB stimulus and fell much less after it was implemented. 

This time the Fed doesn’t have the ECB to bail them out. In fact, the European economic weakness is causing a lot of the earnings estimate declines.

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I think the Fed has everything under control. There is no evidence this slowdown will become a recession and the yield curve is still normal. 

Pausing rate hikes was very smart. Currently, the 10-year yield is at 2.68% and the 2-year yield is at 2.51% which means there is a 17 basis point difference between the 2.

The scary part is how quickly yields have fallen. I’ll be focusing on whether they break their early January lows in the next few weeks.

Global Assets - Conclusion

This article continues my thesis that stocks need to halt their exponential rally, but shouldn’t fall into a bear market again. 

The hardcore bearish thesis is overzealous as there isn’t an earnings recession set to occur and jobless claims are only 16,000 above their cycle low. 

Q4 and Q1 GDP reports will likely be weak, but I still don’t see negative growth. There is no chance of a recession in the 1st half of 2019. This will be the longest expansion since the 1800s.