Weekly Update

January 29, 2016 Update

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A recession just around the corner?

Egged on by the stock market’s miserable January performance, there are increasing concerns that the market drop is projecting a coming recession. Last week we examined a few of the reasons why such a forecast may not be on point; how the economy might continue plugging along albeit with simmering growth. This week we will review some of the notes floating around that support the notion of recession, attempting to find if there are reasons beyond just the decline in stock prices to support the recession argument.

Much of the recession concern is fear of things which the market is already wrestling with such as plunging commodity prices and the prospect of a “hard landing” in China. Given that the Chinese economy is highly dependent on government intervention, the “hard” landing scenario comes about if China makes some sort of policy mistake by misreading the economic signals and/or some unintended consequences of a policy action. The Chinese government is working very hard to shift the economy from a government-driven infrastructure investment focus to an economy where consumer spending is the primary driver. This shift has been behind a plunge in commodity prices like copper and steel, for example, as China uses half or more of the world’s metal output. While China is slowing down, this has been going on for years and remains easing rather than plummeting as shown in the Chart 1 on the left below. The fear is that credit/debt built up in the Chinese economy will unravel too quickly and come crashing down.

Chart 1: Chinese growth slowing

Chinese growth slowing

Chart 1 on the right holds another sign of concern. China is spending much of its reserves keeping its currency tethered to the U.S. dollar while managing the currency’s decline to what most experts consider its true market-driven level. The chart on the right above shows the declining in Chinese currency reserves.

Recession fears have spread beyond just China and commodities however. This week’s report on durable goods – e.g. the big things we buy like airplanes and heavy equipment – showed poorly. We’ve highlighted in red the many times that such a decline in orders has coincided with recession with the “false” reports boxed in blue. A number of economists would agree that we are already in the midst of a recession among manufacturing companies.

Chart 2: Capital goods orders portend recession?

Capital goods orders portend recession?

Finally, the turn to the negative in corporate profit margins appears to be setting up for a recession. Again, this is not a perfect indicator, but one that works more often than not. The naysayers of the profit margin angle argue that energy company woes are behind this slump and better trends will return later this year.

Chart 3: Declines in corporate profit margins are usually not good for the economy

Declines in corporate profit margins are usually not good for the economy

In short, the fears of a coming global recession are certainly high these days driving stock markets globally down sharply so far in 2016. We obviously won’t know we are in the recessionary storm until it’s too late to react. And that inability to foresee what’s coming is perhaps the greatest fear. The world’s central banks have been strongly supporting markets over the past several years. At some point do economies have to take flight without this support? Many certainly believe so. And they argue that central banks are running thin on ammunition to head off a fresh economic decline.

For more on the risk of recession, the zerohedge blog link here provides it:
Even The Wall Street Journal Is Worried About A Looming Recession

For perhaps a bottom-line between last week’s article and this one, check this out:
The Case for the World Economy?s Defense Is Made as Stocks Swoon

Younger drivers aren’t driving

Realizing Chart 4 is well outside our usual focus we nonetheless found it interesting enough to pass along. Those of us here at TimingCube have teenage and older children. We’ve seen firsthand the disinterest in using a car to get around from some of the teenage set. It’s still unclear why this is to those of us who counted down the days to getting our driver’s license – something that still happens for many teenagers. A car was our chance at independence. But fewer and fewer teens are concerned with driving perhaps as getting around via an Uber or Lyft ride is just a click away. The world … it’s always changing!

Chart 4: Who needs a car?

 Who needs a car?

Market Update

Investors faced a heavy flow of new information as a terrible month of January entered its final week. The week started with bulls still on their heels as oil prices suffered a -5% slide overnight and buyers refused to come into the stock market. The -1.5% slump reversed Friday’s strong gain to keep any momentum from gathering. Tuesday gained it all back despite a -6% performance in the Chinese stock market as oil stabilized and investors stepped into the weakened oil and financial sectors. Oil held up again in Wednesday’s session when a build in oil inventories failed to spark another selloff in the commodity and rumors began circulating that a production cut agreement might be near.
The Fed’s statement from their two-day meeting undid an early rally attempt, however, as investors viewed the statement as perhaps still holding out the prospect of near-term rate hikes. Nasdaq heavyweight Apple (AAPL) tumbled -6% on weak earnings guidance. Broad market indexes gave up -1% or more. A blistering +16% performance from Facebook (FB) paced markets to the upside Thursday while oil continued to benefit from production cut rumors. A slide in durable goods orders kept the rally from gaining much steam leaving indexes +0.5% to the upside. A central bank shocker overnight when the Bank of Japan announced they are pursuing a negative interest rate policy. In other words, telling banks to put their money to work through lending it out by penalizing them from keeping it with the central bank. Investors wrestled with a subpar earnings report from consumer behemoth Amazon (AMZN) while Microsoft (MSFT) announced good results. Buyers stepped in early and never relinquished their hold on the market pushing stocks up +1.8%.

Warm wishes and until next week.