Market Recap

Posted on September 13, 2019 by Gemmer Asset

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Week in Review


It was relatively quiet on the economic news front. Really the only major report was Friday’s retail sales number. Headline retail sales rose 0.4% in August, exceeding economists’ expectations for a 0.2% increase (see chart below). August’s jump was driven by strong sales of motor vehicles and online retailers that was partially offset by weakness at restaurants and clothing stores.



The dynamic of weak manufacturing/solid consumer continues to play out.


The other report that got a lot of press was news that the federal deficit exceeded $1 trillion in the first 11 months of fiscal year 2019 (the fiscal year ends at the end of September). The chart below shows the current deficit of $1.067 trillion. This is the largest ever recorded outside the period immediately after the financial crisis. Note that this chart goes back to 1970.



Of course, this chart is a little misleading because it shows total dollars and not the size of the deficit relative to the size of the economy. After all, $200 billion in 1980 would be roughly $625 billion today. This is why the deficit is typically shown as a percent of GDP. A third approach is to show it in terms of debt service – how much is it costing to service the debt load? The chart below follows this logic. It shows total debt as a percent of GDP multiplied by the rate on the 10-year Treasury.



If this chart doesn’t send a strong message, then that is the point. Today’s debt load is actually sort of sustainable at today’s interest rates. Doesn’t make for a good headline though.


Whatever it Takes Part II


This week and next are big for central bank meetings. This week the European Central Bank did their thing, next week the Fed is up.


As expected, the ECB announced an ambitious new stimulus package in a bid to tackle sluggish growth and persistently low inflation in the Eurozone They cut rates by another 0.1% to -0.5%, as you can see below.



They also restarted quantitative easing, pledging to buy €20bn of bonds every month starting in November. All this was basically as expected. It was a bit unusual that the central bank governors for France, Germany, the Netherlands, Austria, and Estonia all made it a point that they opposed restarting QE. But then again, Germany never liked it the first time around and that didn’t stop the ECB buying over $2 trillion worth of bonds.


It is worth mentioning that outgoing ECB head Mario Draghi made it a point to warn Eurozone governments during his press conference that the central bank could not remedy the bloc’s darkening economic outlook on its own. He urged them to loosen the purse strings, saying: “Now is the time for fiscal policy to take charge.”


This isn’t a new thing for him. Back in July Draghi noted the following:


“What’s hitting the manufacturing sector in Germany and [elsewhere in Europe is] an idiosyncratic shock. Here what becomes really very important is fiscal policy. [T]he mildly expansionary fiscal policy is supporting activity in the euro area. But if there were to be a significant worsening in the Eurozone economy, it’s unquestionable that fiscal policy … becomes of the essence. … I started making this point way back in 2014 in a Jackson Hole speech: monetary policy has done a lot to support the euro area … but if we continue with this deteriorating outlook, fiscal policy will become of the essence.”


He’s looking at the chart like the one below and coming the conclusion that Germany in particular needs to run a more expansionary fiscal policy to spur growth (the chart below shows that Germany has been running a budget surplus since 2013).



It’s not going to happen unless things get a whole lot worse. If Germany wasn’t willing to spend when the Eurozone was on the cusp of implosion back in 2011/2012 it isn’t going to happen now.


Another Lesson in Diversification


This week gave us another lesson in why you diversify. After all, if you were building a portfolio based simply on past performance you’d own nothing but growth stocks going into this week – the bigger and growthier the better.


However, this trade was hammered this week. One way to show this is below. On Monday the worst 12-month performers in the Russell 1000 equity index were up by the most while the best 12-month performers were down the most. I’m not sure I’ve ever seen such a rapid change (maybe back in 2000?).



Another way to show this is to highlight the performance of the momentum factor.


By way of background, some investment analysts like to break the market down into factors. For example, cheap stocks (the value factor) have been shown to outperform over long periods of time. Same with small-cap stocks (although the value and size effect are argued about endlessly). Another factor is momentum, typically defined as stocks that have simply gone up a lot over the last three, six, nine, or twelve months. It’s the idea that rising prices beget even higher prices as investors chase past performance.


The chart below shows the 10-day rate of change for this factor. It notched up its third worst return since the late 90’s.



If you run a 2-day rate of change the momentum factor posted its worst showing ever!



Bespoke looked at things a little differently. To quote a recent analysis they ran:


“Through (Wednesday’s) close, the S&P 1500, which is comprised of large-caps (S&P 500), mid-caps (S&P 400), and small-caps (S&P 600), was up just under 1% on the week. The average week to date performance of individual stocks in the index, however, was a much more impressive gain of 5%. By far the biggest gains have come from the stocks with the lowest share prices. Coming into the week, there were 55 stocks in the S&P 1500 that had share prices of less than $5, and through Wednesday’s close, they were up an average of 21% with 54 of 55 in the black. 21%!!!! Coming into today, there were also seven stocks in the S&P 1500 that were already up over 40% this week, and guess what? They all came into the week with share prices below $5.”



Hence the massive outperformance of small-value versus growth stocks of every kind. Was there a reason for this change of heart? Not that we could see. Human emotions are a fickle thing. But another lesson in the need for diversification.


Are Digital Cameras Becoming a Relic of the Past?


Oh, great, another iPhone was launched this week. Do we really need a new version?


I guess need has nothing to do with it. As best I could tell, the biggest improvement in the new phone is an improved camera. The iPhone 11 Pro will have three cameras on the back – wide angle, telephoto and ultra-wide.


I know, be still my beating heart!!.


But let’s think for a minute how our camera buying habits have changed in recent history. Who buys standalone cameras anymore? The chart below shows that they are few and far between.



This industry is on the verge of disappearing, much like Kodak.


But what we do with pictures culturally has also changed dramatically. As Om Malik noted this week:


“What we are doing is creating selfies, documenting moments with family, and snapping photos of food and latte art. We aren’t even trying to build a scrapbook of those images. It is all a stream — less for remembrance than for real-time sharing. In other words, we have changed our relationship with photography and photographs. It used to be that, photos served as a portal to our past. Now, we are moving so fast as we try to keep up in the age of infinitesimal attention spans. A minute, might as well be a month ago.”


Have a good weekend.





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