Is the Bear Market Here Yet? Market indicators suggest that the nine-year bull cycle has more room to run
(…) Late last year, analysts at Bank of America Merrill Lynch compiled a set of 19 indicators that have preceded past bear markets, which are unofficially defined as a 20% retreat from the most recent peak. Right now, those signposts suggest that the risk of a downturn is rising but that a reversal isn’t imminent.
In the past, bear markets were on the horizon when 80% of those signals—which include rising interest rates, growing consumer confidence, tightening credit conditions and surging market volatility—have been triggered. Right now, 13 of the 19 indicators have been tripped. Several others, such as a narrowing gap between short-term and long-term bond yields, a condition known as a flattening of the yield curve, are inching closer.
While a 68% hit rate might seem high, this threshold was typically reached an average of two years before stocks peaked in the past seven bear markets, according to a Bank of America report dated March 13. (…)
The Lesson From Stock Corrections Past? 200 Days of Pain
(…) In this bull market alone there’s been five other corrections like this one, and it’s taken around seven months on average for equities to climb out of their hole. Based on that path, the current jitters won’t be fully eradicated until August. (…)
Since 2009, the average correction in U.S. stocks has lasted 200 days and lopped 14 percent from the S&P 500. (…)
Valuation is not a timing tool but it helps measure valuation risk vs reward. This is the first correction this cycle when valuation was near extreme levels. It really is the first “greed correction” this cycle.
It is important to watch the yellow line, the Rule of 20 Fair Value, which is [(20 – inflation) * EPS]. It was steadily rising during the first two corrections as profits rose strongly; it declined in the next two as profits either stalled or declined while inflation rose slightly.
This time, profits are surging much faster than inflation which, with the market correction, is bringing a quick and steep drop in valuation back to “Fair Value” range after “normalizing” 2017 EPS with the 7% expected tax reform boost.
The chart uses trailing data. If analysts prove right on their 2018 earnings estimates of $158, the S&P Index “fair value” per the Rule of 20 will be 2875 next February, assuming 1.8% inflation. As I wrote in Monday’s THE SITTING BULL
As 2018 progresses, the race will be between growth in profits and growth in consumer prices. If profits meet the current full year bottom-up forecasts of $158.00, the S&P 500 index sells at 16.3x forward EPS. For the Rule of 20 P/E to be at the 20.0 fair value, inflation could rise to 3.7%, double its current reading! If inflation is 2.5% by year-end, fair P/E would be 17.5 which would mean 2765 on the S&P 500 Index assuming $158 in EPS.
Given recent corporate guidance, Q1’18 earnings seem likely to meet or exceed forecasts. If inflation remains stable, only sharply deteriorating sentiment would drive equities much lower. In the middle of the last correction, valuation dropped to 18.3 on the Rule of 20. That would bring the S&P 500 Index down to 2440, 6.7% lower than now. This next chart uses EPS of $158 and 1.8% inflation at the current 2610 level:
This chart from Ed Yardeni shows previous corrections against the 200d m.a.. I find important to watch the slope of the 200d m.a. and whether it gets crossed over or not.
The FANG+ Index is currently sitting on its 100d m.a. following its 12.5% setback. There is another 9.4% step before its 200d m.a..
Lowry’s Research says that last week’s sell-off clearly failed to exhaust Supply and that its indicators “suggests the risk of further near-term losses remains elevated.” Risk-parity trades need to be undone…
The main economic risks lie with the U.S. consumer as interest rates and inflation rise in tandem:
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Honda to Trim Production of Its Flagship Sedan The auto maker will stop making its Accord for 11 days through July to align production with market conditions
(…) Unlike Detroit auto makers that have either eliminated entire sedan lines or slowed down sedan production over the past year, Japanese, German and Korean auto makers haven’t taken their foot off the pedal.
Just this year through February, Honda, Toyota Motor Corp. and Nissan Motor Corp. have collectively sold about double the amount of sedans in the U.S. compared with the Big 3 Detroit auto makers, according to Autodata Corp. (…)
Honda’s dealer inventory of the Accord was over 100 days’ supply in February, much higher than what’s considered healthy for the industry, according to data from WardsAuto.com. (…)
Year to date through February, sales of the Accord are down 12.9% to 37,430 units sold. Toyota, meanwhile, has seen a 2.3% increase in Camry sales through February to 48,929 vehicles.
Nissan will also slow production at its plant in Tennessee, which produces a number of vehicles including the Altima and Maxima sedans, along with the Rogue crossover, among others. Dan Mohnke, Nissan’s head of sales in North America, said in an interview last week that the auto maker will slow the speed of its lines to reduce inventories by about 15% through June. (…)
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Rise in Key Rate Pinches Borrowers Companies are paying the most in nearly a decade for some types of short-term borrowing, the latest threat to a long-running U.S. economic expansion.
(…) The three-month London interbank offered rate climbed to 2.29% in the U.S. on Monday, its highest since November 2008. Libor measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, from corporate loans to home mortgages. (…)
Some real-estate investment trusts, which hold property such as offices and other commercial buildings that generate income, are starting to feel the impact. They tend to borrow more, and about 15% of their borrowing is floating-rate debt typically tied to Libor, according to Deutsche Bank estimates. (…)
The average cost for nonfinancial corporations to borrow in the commercial paper market for 90 days has more than doubled over the last year. (…)
Holders of roughly $1.2 trillion in consumer mortgages that are pegged to a form of Libor stand to pay more, too, while rates on some other types of consumer debt, such as private student loans, are also likely to move higher. (…)
Beware companies financing long-term assets with short-term loans…There will be blood, often times in surprising places.
2020!
Waymo Orders Up to 20,000 Jaguar SUVs for Driverless Fleet
The deal, announced Tuesday, is potentially worth more than $1 billion, and escalates Waymo’s effort to put vehicles on public roads without human drivers behind the wheel. The vote of confidence comes a day after Arizona’s governor suspended Uber from testing in the state following the first pedestrian death involving a self-driving vehicle. (…)
Waymo will add its driverless technology to the new Jaguar I-Pace all-electric sport-utility vehicle and it said it would begin testing this year before deploying the SUVs in 2020. The companies said as many as 20,000 of the SUVs will be built in the first two years, and more vehicles could be purchased after that. (…)
Waymo says a fleet of 20,000 Jaguars could serve a million trips a day. A fleet about that size has the potential to service a small to midsize community, according to research conducted by Larry Burns, who has consulted for Waymo and worked at General Motors as head of research and development. (…)
Ryder to Launch Commercial Vehicle-Sharing Platform
Ryder System Inc. R -1.94% is developing an Airbnb-like marketplace for transportation assets that puts idle commercial vehicles in the hands of users looking to affordably expand capacity.
Ryder, which provides short-term truck rentals and fleet-management services for companies, said Tuesday that during the work week about 25% of U.S. commercial vehicles sit unused for more than a day.
The company’s new service, dubbed COOP, was launched in January in the Atlanta metro area. Ryder said it plans to fully expand the service in the Atlanta area next month and into several other major markets next year. (…)
Ryder will have to figure out how to serve customers of its new rental marketplace without driving down prices in its actively managed fleet business.