Global CIO Commentary by Scott Minerd
Market internals are eroding and volatility is increasing. From the deterioration of the situation in Europe to slower growth and bird flu in China, there are several major risks on the global macro landscape. At some point, these foreign storms will reach our shores. Recent downturns in the markets have demonstrated how vulnerable asset prices have become to the arrival of bad news and data that does not meet expectations. Adding all of this up, it appears we are in the early stages of a broad consolidation.
Equities are priced for perfection. We don’t need the end of the world for a correction, just something less than perfection.
Recent data on the transport sector confirms the view that the equity market has gotten ahead of itself. A divergence of transport stocks against major averages, such as that which we are currently seeing, usually signals a changing trend in the near-term. This probably means equities will be 5% to 10% lower by the summer, and we will see some modest spread widening in credit, perhaps 10% to 15% wider than today’s levels. There is less risk for Treasuries because any perceived slowdown in economic expansion will be interpreted as increasing the likelihood of extending quantitative easing.
Transports Lead the Way
Dow theory posits that the strength of the transportation sector indicates the direction of the broader economic trend and overall market. Over the past 12 months, weakness in the transportation index has consistently been followed by corrections in the industrial index. With the divergence between the transportation index and the industrial index increasing again, the possibility of a near-term correction is rising.
THE DOW JONES TRANSPORTATION AVERAGE INDEX VS. INDUSTRIAL AVERAGE INDEX
Source: Bloomberg, Guggenheim Investments. Data as of 4/16/2013.
Economic Data Releases
Consumer Indicators Disappoint as Housing Data Mixed
- March retail sales were below expectations at -0.4%, the worst in nine months.
- University of Michigan consumer confidence fell in April to the lowest level in eight months.
- Housing starts jumped 7.0% in March to an annual rate of 1.04 million, the largest increase since June 2008. A surge in multi-family housing units made up the gain.
- The NAHB Housing Market Index fell to 42 in April, the third consecutive decrease.
- Building permits dropped 3.9% in March to a pace of 902,000.
- Industrial production rose a better-than-expected 0.4% in March.
- Initial jobless claims fell by 42,000 to 346,000 for the week ended April 6th, the largest drop since November.
- The CPI fell 0.2% in March, with PPI dropping 0.6% as energy prices declined.
Eurozone Production Expands, Growth in China Slows
- Eurozone industrial production rose 0.4% in February versus an expected 0.2%, but remained in contraction in yearly terms.
- The ZEW Survey of investor expectations in Germany fell for the first time in five months in April.
- The CPI in Germany remained at a 27-month low of 1.8% in March. March consumer prices both in France and Italy were also at more than two-year lows.
- China had an unexpected trade deficit of $0.9 billion in March, as exports grew 10% and imports were up 14.1%.
- China’s first quarter GDP was weaker than expected at 7.7%.
- Industrial production in China grew 8.9% in March, the slowest pace since August 2012.
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