Weak Business Investment - Another Rally To New 2019 Highs

After falling slightly, the market regained its extreme momentum on Friday. S&P 500 was up 0.64%, Nasdaq was up 0.91%, and Russell 2000 was up 0.92%. VIX was down 6.57% to 13.51 making it an even better time to buy protection from this unsustainable rally. 

The S&P 500 is now up 11.4% year to date. CNN fear and greed index increased to 69 which signals greed. S&P 500 is now 4.71% off its record high. It is up 18.78% from Christmas Eve. Russell 2000 is up 25.51% in that period. 

As you can see from the chart below, as of February 20th, the S&P 500, investment grade bonds, high yield bonds were all high. Also, Brent crude oil, and gold all had a 14 day RSI of above 70. Meaning, they are all overbought. 

This has truly been an everything rally.

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Weak Business Investment - Only Utilities & Real Estate At All-Time Highs

Worst sectors on Friday were consumer staples and the financials which fell 0.28% and 0.23%. 

Kraft Heinz was subpoenaed by the SEC and missed earnings estimates. Its stock fell 27.46% which brought the consumer staples sector down. 

Best 2 sectors were technology and communication services which increased by 1.29% and 1.05%. Even though the market has increased rapidly, only the utilities and real estate closed at their all-time highs today.   

Weak Business Investment - Momentum Could Be Good?

The stock market has extreme momentum. It has pushed 92.5% of S&P 500 stocks above their 50 day moving average. 

As you can see from the table below, when more than 90% of stocks are above their 50 day moving average it’s generally a good sign. 

The median 1-month return is 3% with gains occurring 76.9% of the time. 3-month returns are 4.6% with positive returns occurring 92.3% of the time. 

That would put the market near its record high. It seems to be universally excepted that when stocks run up too fast they need to pull back.  

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Weak Business Investment - GDP Updates

The hard data that was released after the government shutdown suppressed the GDP estimates for Q4 and Q1. They verify the economic slowdown that I called for at the end of last summer. 

CNBC Q4 GDP rapid recap as of February 21st has the median of 11 estimates at 2%. St. Louis Fed Nowcast is already on Q1. It expects a 2.47% growth. 

As usual, it is optimistic. The February 22nd Q4 NY Fed Nowcast was updated from 2.23% to 2.35%. 

Nowcast was principally helped by the durable goods orders report. The Q1 estimate was revised higher from 1.08% to 1.2% as the durable goods report helped it. But the Philly Fed report hurt it.

Finally, the Atlanta Fed GDP Nowcast was revised lower from 1.5% to 1.4%. Durable goods report pushed the estimate for real non-residential equipment investment growth from 4.5% to 3.9%. 

As you can see, the Atlanta Fed treated this report the exact opposite way the NY Fed did.  

Weak Business Investment - Strong Headline Durable Goods Orders Report Masks Weakness

December durable goods orders report had a great headline number, but the underlying core orders were very weak. This continues the trend of weak business investment growth. 

It seems to have occurred after the boost from the fiscal stimulus and capital repatriation holiday.

Specifically, new order growth was 1.2% month over month which beat estimates for 1% growth. The November report was revised lower from 0.8% growth to 0.7% growth, partially explaining the headline beat. 

Ex-transportation growth was 0.1% which missed estimates for 0.2% growth. This was explained by the November report being revised up from -0.3% to -0.2%. 

Weak Business Investment - Core capital goods orders showed the real weakness 

Even though the November growth rate was revised lower from -0.6% to -1%, the December growth sharply missed estimates for 0%. It came in at -0.7%.

Machinery, computers, and communications equipment had declines in order growth which should impact Q1 GDP growth. Actual shipment growth was 0.5% which makes up for the 0.2% decline in November, explaining why the NY Fed’s Nowcast estimate increased because of this report. 

Aircraft orders once again skewed the headline number. They were up 50%. Vehicle orders were up 2.1%. Unwanted inventories were up 0.2% and shipments were up 0.8% which pushed the inventory to sales ratio down from 1.61 to 1.6.

Weak Business Investment - Redbook Bounces Back

Bulls pointed to the great Redbook same stores growth results in December to counter the weak December retail sales report. 

However, that argument was deflated by the weakness in the latest Redbook reports because growth had decelerated. I was nervous about the Redbook weakness in previous weeks. Yet the sentiment readings such as the University of Michigan consumer confidence report and the Bloomberg consumer comfort index indicated some improvement. 

We finally saw some of that improvement in the Redbook same store sales report from the week of February 16th. Growth was up from 4.6% to 5.4%. Keep in mind, this is a very strong report. But the rate of change was worrisome as it peaked at 9.3% in December and fell all the way to 4.6% in the previous report.

Weak Business Investment - Strong German Numbers

Bears have been pushing the narrative that the European economy is about to go into a recession. While most European reports are looking weak, it’s a bit of an overreach to say a recession is a lock. 

Latest Q4 GDP numbers from Germany were actually very good. But they were masked by an inventory adjustment. The German GDP growth was 1.4% in Q4.

German real private consumption was up 2.6% quarter over quarter seasonally adjusted and government consumption was up over 5.1%. 

As you can see in the chart below, consumer expenditures, government consumption, investment, and net exports, all had sequential improvements. Only the change in stocks reversed sharply because of temporary problems in the German car industry. 

You don’t see all these improvements when an economy is going into a recession.

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