2016/01/14 Commentary: Meltdown Time? Redux (early)
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COMMENTARY (Non-Video): Thursday, January 14, 2016
Meltdown Time? Redux
Since our Meltdown Time? post exactly one week ago it seems as if that was indeed the major result of all the negative factors noted throughout last year and intensifying since late summer. While the selloff has been both immediate and vicious, we had also noted in the late-November Santa’s Back!! that once the seasonal portfolio manager window dressing was over at the end of last year we remained very skeptical of the economic outlook and equities into this year.
Even allowing that we had no more insight than anyone else on the degree to which the bearish tendencies would be so aggressive right from the top of the year, the immediate technical breakdowns signaled the likelihood of further weakness right from the US opening on January 4th. [See last week Monday’s Commentary: Special alert (early).]
▪ As we already reviewed so much of the background last week, we refer you to all of that rather than replicate it here. There is a brief bit of further reinforcement for the negative outlook we maintain for 2016 (especially the first half of the year), after which we will proceed with a brief assessment of the critical trend condition of the equities.
▪ The bottom line is that as far and as fast as the US equities have dropped the first part of this year, whether they will now enter an extended meltdown phase will likely be determined very soon. That will depend on what transpires late this week into next at the critical lower major support they are now nearing. That will of course be a significant direct influence on the other global equities, and meaningful counterpoint for the fixed income markets (at least in the current phase.)
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▪ Just to revisit a bit of the background that you can review at length in last Thursday's Meltdown Time? post, there is a ‘tripartite confluence’ of negative factors that have triggered the aggressive selloff in global equities from the top of this year.
We are always quick to point out that one negative factor alone is rarely enough to foment a down trend in equities. At present however, the magnitude of each negative and the degree to which they are not likely to be addressed any time soon (other than a possible volte face by the Fed) means there was suddenly no reason to feel good about either the global economy or equities.
▪ Those include the general weakening of global economic activity that is apparent not just from the deterioration in the near-term economic data, but also the more major outlook as articulated in much we have reviewed from the Organization for Economic Cooperation and Development (OECD.) And nobody can doubt that the geopolitical situation is more fraught with risk and turmoil than at any time since the late part of the Carter administration. Last but not least there is the Fed, which still seems considerably burdened with its ‘normalcy bias’ that we have explored at length (see our December 16th post.)
Further OECD indications
▪ Compared to the major semi-annual OECD Economic Outlooks the monthly Composite Leading Indicators (CLI) releases have a peculiar editorial tendency. As we have noted on many previous occasions, the titles of monthly updates attempt to be upbeat no matter what the actual data may show.
The headline for this Monday’s latest Composite Leading Indicators (November’s indications with the typical two month delay) was “Composite leading indicators continue to point to stable growth momentum in the OECD area.” Yet even a cursory review of the actual graphs of the future economic indications shows that this is simply not the case.
The US is clearly in a cyclical downturn since as far back as late 2014, and weakening further at present. The same is true for the UK along with Japan. Of course China is still weak, and commodity economies like Canada and Russia are commensurately still suffering, even if India and Brazil might be bottoming.
While the Euro-zone seems to be recovering, that is not of much comfort for two reasons. The Euro-zone is starting from a very low base on both economic growth and inflation, and the recent data has not been very inspiring. And in any event, we have the same question as previous on that: With so many other major economies weakening, are we really going to rely upon Europe to lead the way higher?
▪ And of course, that is merely the latest set of atypically downbeat indications from the OECD. As the monthly CLI titles imply, OECD would rather always take a ‘glass is half full’ view of the global economy; at least in between the recent far more negative semiannual Economic Outlook analysis and presentations.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out last month that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
The COMMENTARY Extended Trend Assessment is accessible below.
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