The current market action and headlines is starting to sound eerily similar to that of late 2015. As a reminder, the world was concerned about global growth and China surprised the market with a currency devaluation, very rare for a country that pegs its currency and only allowed it to move with a band. This suggested China’s economy was weakening and a devalued currency would help the exporter nation bounce back. Since China is essentially a black box and essentially no one actually trusts the numbers they put out, this allowed the market to write its own narrative and that China’s economy had to be weak and that would drive everyone else down with it.
Recall oil at the time had also fallen from $100/bbl to $50-$60/bbl (and was about to drop to a low in the mid-$20s). This too pointed to China weakening and slow global growth. Lastly, corporate earnings were not that great. Especially among industrial names, such a Caterpillar, which is a bellwether for the global economy.
However, that actually didn’t seem to be the case. The market eventually rallied strongly, commodity prices rebounded (as it turns out excess supply could be absorbed and production curtailed), and people became more comfortable that if anything, China was headed for a soft landing and going to go through a bit of a deleveraging stage.
That placated the market for a bit… until now. The narrative sounds too similar to ignore, but the surrounding facts around it all are different. For example:
- People are concerned about China: China posted the slowest growth in a decade. Forget that its still growing amazingly quickly for the third largest economy. Forget the well documented commentary about Xi Jinping wanting to move China to a service economy like the US, a dramatic move from its current export economy. Focus on the negative. This time, its business confidence in China is low and the tariffs wont help…
- Oil posts a 9 day losing streak: For now, people are associating the decline with supply, a mistake from last time I assume they don’t want to repeat, but there are some headlines that say for example “Oil’s unraveling shows global economy is in a tough spot.” Forget US output at record levels and OPEC pumping as much as it can since 2016.
- Earnings have not been good so far. And to provide the context for this time vs. ’15/’16, Caterpillar was down nearly 30% since it reported Q3 earnings. However, companies today are reporting “some softness” and most earnings trouble has been related to “inflation”. I put inflation in quotes because it is difficult for me to look at many companies who have benefited from oil falling (decline in raw materials) and able to hold price steady (boost to margins) that now are complaining about giving that back. Freight and labor I’ll admit are real. Labor obviously because the slack from the financial crisis has been absorbed and freight is higher after new rules limited hours truckers can be on the road… and actually enforced it…
There are obviously other issues at hand such as interest rates at 3.2% for the 10-year (20bps above where it ended 2013, but OK I guess that will stifle growth…) and the impacts to housing.
Bottom line: I am avoiding the headlines which have had very little predictive success.