“When The Walls Come Tumblin’ Down”?
“When the walls come tumblin’ down,
When the walls come crumblin’ crumblin’,
When the walls come tumblin’ tumblin’,
Tumblin’ tumblin’ down”
– From the song Crumblin’ Down by John Cougar Mellencamp (1983)
Worldwide fundamentals have signaled weakness for some time now and US equity market technicals are beginning to catch up. The long overdue bull market correction may finally be upon us, if not the emergence of a bear market (historical average duration of 14 months). We may not know for several days, perhaps weeks, but a key technical indicator regarding market strength has been breached for the first time in a long time.
The August 7, 2015 intraday chart for the S&P 500 is presented below. The 50 day simple moving average (blue line) has crossed over the 100 day simple moving average (green), a bearish phenomenon not experienced seen since mid-December 2012.
If you have not already hedged your “downside” with individual stock puts, SPY or QQQ index puts, and you have not already trimmed long positions to increase cash as specifically appropriate; this is a big signal, the time is right now.
We, here at Sachem Rock, see increased fundamental challenges for worldwide equity markets in the near term.
The rationale supporting this outlook is based on a myriad of economic factors, both domestic and worldwide, not the least of which, is the extremely low income growth that has persisted in the US and Europe since the current expansion began in 2009.
During the second quarter, the Employment Cost Index (US), a measurement of growth in domestic worker compensation including benefits, recorded the weakest reading in the thirty-three years the statistic has recorded. What was more alarming is that compensation only rose for workers in the government sector; private sector worker’s compensation was flat.
China’s economic growth seems to be slowing markedly below the 7% range the Chinese government has reported over the last several years. How do we know? Tepid Chinese demand for commodities have caused a significant and widespread decline in commodity prices during 2014-15. As a major exporter of manufactured goods to the world, we see China’s economy as an indicator of the overall health of the worldwide economy. Chinese imports and exports have been in a declining trend during 2015.
Commodities are the major exports for many emerging market economies including Peru, Chile, Venezuela, Indonesia, Malaysia, Angola, Nigeria, and even developed economies of Canada and Australia. Lower commodity export prices will have a growing adverse impact on emerging market economies that will eventually spread to developed economies.
Declining commodity prices also represent a risk to emerging market economies’ ability to service the increasing public and private (corporate) debt built up over the last several years. Several commodity based countries with low currency reserves, including Venezuela, Nigeria, Malaysia, and Russia. The threat of default is likely elevated if commodity prices remain at low levels for an extended period of time. Total worldwide currency reserves have begun to decline in 2015 for the first time since 2004. By the way, the United States is not even in the top ten.
Other near term adverse factors include…
- Commodity hedges in place for 2015, (especially in the oil and gas industry) will begin expiring, and this will force energy companies to further curtail capital expenditures for exploration and development, and they will begin to layoff many more workers.
- Widespread worldwide government intervention in financial markets including equity (Chinese restrictions on stock sales), currency, and debt markets (Greece, US Federal Reserve Quantitative Easing and the European Central Bank Quantitative Easing) has reduced these markets’ abilities to react and self-correct quickly and efficiently.
- Recent weakness in manufacturing economic data, due to the rising valuation of the US dollar versus other currencies. If the long speculated US interest rate hike by the Federal Reserve for September occurs, it will further strengthen the US dollar and will result in an increasing headwind for US global price competitiveness.
- Declining Consumer Confidence (US) reflected not only in the various surveys, but also in domestic data such as housing sales, whether it may be from high prices, high taxes, mobility, income sufficiency, or income stability.
- Some of the leading sectors in this market for 2015; Biotech, Pharmaceuticals, and Media recently have begun to break down.
- Share prices of companies with high growth characteristics are priced for “perfection” (high P/E ratios).
- Shares prices of companies that exceeded earnings expectations declined sharply immediately after announcement of earnings. Additionally, we have noticed an increasing incidence of downward revision to future revenue and earnings guidance in this quarter’s earnings reports.
- ObamaCare and dramatically increased annual deductibles under this new entitlement has resulted in a “seasonal” effect on economic activity in the first calendar quarter of the year. Health insurers project double-digit premium increases for 2016.