And just like that, the mid-year U.S. recession is over.
Or is it? The mood on Wall Street has improved over the past week and a half. Amazing what a few up days for the markets do for sentiment. Those who were calling for a surprise U.S. recession by mid-year (and in the process, pummeling overvalued equities) are becoming less concerned. Materials stocks are suddenly great buys because a China regulator got his head handed to him. Oil has caught a little bit of a bid, so that makes the destroyed oil patch a great place to do some bottom-feeding.
However, is it too early to be getting enthusiastic again on stocks? After all, the GDP report due out later this week could realistically surprise to the downside based on recent readings on consumer spending and industrial production (it could even be slightly negative). And if it does surprise to the downside, it would seriously undercut the enthusiasm presently infiltrating stocks.
I think if you study the three charts below, it will become clear we may be experiencing nothing more than a bounce inside of a longer-term pullback in equities.
Basic Materials Are Still Lagging the S&P 500
The iShares U.S. Basic Materials ETF (IYM) has bounced back, stoking optimism that China's slowdown will not be too severe. I think the rebound has also reflected renewed hope for an improvement in the U.S. industrial economy this year, although the guidance from John Deere (DE) last week would suggest otherwise. A Honeywell (HON) bid for United Technologies (UTX), I believe, is more a function of giant conglomerates trying to cut costs amidst sluggish longer-term global growth.
At the bare minimum, to be more upbeat on stocks I would like to see IYM outperform the S&P 500 -- it hasn't done this during the latest rally from the lows.
Transports Are Also Lagging the S&P 500
Railroads, truckers, logistics companies -- save for UPS (UPS) -- mostly had ugly conclusions to 2015. Their initial outlooks for 2016 did not exactly engender confidence that earnings estimates have bottomed. According to the Association of American Railroads, total carloads for the week ending Feb. 13 were 244,334, down a sickening 15.4% year over year. North American rail volumes plunged 13.2%. These aren't numbers signaling a bottom in global demand -- they are numbers suggesting get out of stocks and into cash!
If you have become bullish on stocks in the last week, ask yourself this simple question: Shouldn't the Dow transports (pictured below) be leading the S&P 500, so as to confirm rising macro optimism? At the moment, it's lagging the broader measure of equities.
The Baltic Dry Index Is Still Dead
The alleged leading economic indicator hit a historic low on Feb. 10. Since then, it hasn't done much. Seeing as the Baltic Dry Index has stayed with a downward bias relative to rising optimism on the global economy, it offers a signal the rally may be false.
If the Baltic Dry were to reawaken, it would make one feel slightly better on the outlook for Chinese imports and demand among emerging markets (which has slowed). Until then, I think you have to proceed with caution.