Even before today’s market tumble, stocks seemed to be dismissing good economic news.
Most of the U.S. numbers, after all, have impressed recently. Measures of unemployment are still at multi-generational lows, manufacturing and consumer sentiment is through the roof. Goldman Sachs just raised its domestic growth forecast and Bank of America Merrill Lynch expects a summer rally.
But the price action between various sectors may be telling another story. Typically, stronger growth lifts interest rates. People travel more and businesses ship more orders, which should help transports. Companies invest more in capital goods — usually a positive for industrials.
But in the last month, just the opposite’s been happening. Bond yields have fallen and may have few reasons to go up again until the Federal Reserve meets in September. Airlines are breaking to new 52-week lows. And, industrials are the worst major group with a 5.5 percent drop. Meanwhile groups that benefit from lower rates and weaker growth, especially consumer staples and utilities, have advanced.
A couple of things seem to be going on. First, activity outside the U.S. has worsened. German estimates are coming down and China’s factories are slowing. Emerging markets like Turkey and Brazil have endured minor currency crises. Second, worries about President Trump’s trade policy continues to weigh on large companies doing business overseas. (Despite his tariffs apparently helping a lot of domestic factories.)
Third, there are few catalysts right now for a more aggressive outlook. Earnings season is more than a month away, but only after we get through the July 4th doldrums. There’s also plenty of political uncertainty overseas: Will Angela Merkel will survive in Germany? What’s the next big surprise out of Italy? Will Mexico’s presidential election on Sunday unleash a new wave of tweets and tariffs?
In conclusion, headlines have been very positive in the last month. But some internals on the market may cast doubts on the rosy outlook.