I opened the month with a comment on the market doing a face-plant.
The market continues its face-plants.
Long-term indicators are now even more positive while short-term indicators, highly volatile of late, remain slightly negative. The biggest positive I see are the new lows in corporate bond yields. It can hardly be overstated how positive it is that corporate bonds have made new lows. If our economy were on the cusp of a recession, corporate bonds would be getting much riskier, and their yield would rise to reflect that heightened risk. This would not be the time for them to make new lows.
Over the last 100-years, there have only been three times when corporate bond yields gave false positives (remaining low as a recession approached) on the economy, one of which was the 1945, the end-of-WW2, and the coming of demobilization, and another was the deep recession in 1938 as a result of fiscal tightening. Today, we are not suffering from a fiscal tightening.
Also, the lack of inflation gives the Fed wide latitude to cut rates further, if need be.
Another reason for me to believe things are not as awful as the markets seem to believe is the money supply. It is still rebounding from a two year decline, but its improvement is another sign of stable growth in both borrowing and bank lending. The consumer is still strong.
Yet, there is real terror out there. Blood in the streets kind of terror. Interest rates have fallen so fast and so far. Foreign growth is virtually non-existent. Trade issues are concerning people and freezing American businesses from making investment decisions.
Take a look at the chart below. It’s from American Association of Individual Investors. These aren’t professional investors. And they are as scared as they were last December and almost as scared as they were in the depths of the Great Recession of 2008-09. What you see in the chart is the spread between those non-professional investors willing to buy and those who want to sell. The chart shows that, in spite of the S&P 500 being near an all-time high, small investors are at -26.5, meaning many more are looking to sell than buy.
Ironically, this degree of negativity is much more often a sign of a coming strong move up than a move down. Check the chart to see what I mean. The green line rockets up – or it has in the past – when the reading gets this negative.
For sure, I don’t know what’s ahead; but if you’re not out of the market yet, I’d suggest you hang on.
Blessings to you all.