A funny thing is happening on the way to a newfound economic prosperity in the USA: there are clear signs of a slowdown in growth in the first quarter. The markets began this wild rally in November on hopes that the Trump Administration's decidedly pro-business policies, if implemented, would lead to an acceleration in growth.
Implementation has been swift, with a flurry of pro-growth executive orders boosting the resources industry, among others. Predictably, action in Congress has been slower, and progress reports on congressional actions are -- unfortunately, in my opinion -- going to hog the financial media's attention and take market participants' attention away from their true purpose: predicting the future growth of earnings and determining the proper discount rate for those future earnings.
That process can either be done by religiously following CNBC's stream of pulse-taking from D.C. -- or by analyzing hard numbers. If you have been reading my Real Money columns for the last four years, you might guess which method I choose.
So, here is the recent performance of six indicators I follow closely. Note they are all telling the same story:
- The Atlanta Fed's GDPNow forecast model is now predicting U.S. GDP growth of 0.9% for the first quarter of 2017.
- The spread between the 2- and 10-year Treasury is now trading at 1.18 percentage points, down sharply from the nearly 1.4 percentage point reading in the post-election frenzy in November.
- Similarly, the Treasury-Eurodollar spread (TED Spread) has fallen to 0.4 percentage points from a November peak of about 70 basis points.
- West Texas Intermediate crude prices are quoted at $48.75 per barrel as I write this. The recent gap down below $50 a barrel is striking in that it occurred after a three-month period of prices consistently above that threshold.
- Copper is trading at $2.65 per pound, down from the recent high of $2.79 recorded in early February.
- The DXY dollar index has pulled back to just above $100, after the Fed's action this week. Thoughts of a more-bullish Fed had propelled DXY to $103 at year-end, and the index was reading above $102 last week.
So, at the margin -- and remember the second derivative is the most important factor in investing -- the U.S. economy's rate of growth appears to be slowing. To be fair, other indicators, like the NY Fed's GDP nowcast (which is predicting a first-quarter 2017 GDP for the U.S. of 3.2% versus the Atlanta Fed's 0.9%) and the Commerce Department's Index of Leading Indicators (which includes stock prices as one indicator), are indicating a more sanguine picture for U.S. growth.
But keep in mind that those six indicators I list, above, are not data points I cherry-picked owing to their relative weakness. On the contrary, they are the "internals" that I use as a proxy for U.S. corporate earnings, and I watch them everyday.
So, I am seeing a clearly slowing macro trend, and that leads me to believe bonds will outperform stocks for the next months. As the S&P hovers near a 12.5-year high, measured by ratio of price-to-corporate earnings, I believe much of the upside has been priced out of the equity markets.
There's nothing in my six indicators that has me yelling "sell, sell, sell" on stocks, but the lights are flashing yellow. As my firm grows and I take in new money, I am favoring corporate bonds and preferreds. I wrote about one such issue -- Frontier Communications' (FTR) mandatory converts -- in my RM column yesterday, and if you'd like more individual ideas please reach out to me.