President Donald Trump’s critics charge that he is inciting global tensions to deflect attention from his domestic policy failures, though he has been in office for less than 100 days.
Whether this charge is right or wrong, might heightened geopolitical conflicts force the administration to postpone the domestic policy agenda?
It’s possible, and that might explain why the stock rally has stalled. It’s also possible that the market is simply experiencing some profit-taking among the rally’s recent sector leaders, including Financials and Industrials.
Here is the S&P 500’s sector derby since November 8 through the March 1 record high:
Financials (26.0%), Industrials (14.0), Materials (12.8), Information Technology (12.2), S&P 500 (12.0), Consumer Discretionary (10.9), Health Care (10.7), Telecommunication Services (8.9), Real Estate (5.3), Consumer Staples (5.0), Utilities (3.9), Energy (3.9) (Fig. 2).
Here is the derby since the March 1 top through Thursday of last week: Utilities (1.2), Real Estate (0.2), Consumer Discretionary (-0.7), Consumer Staples (-0.7), Information Technology (-0.9), Health Care (-2.1), S&P 500 (-2.8), Telecommunication Services (-3.1), Materials (-3.7), Industrials (-3.9), Energy (-4.0), Financials (-9.0).
Of course, another reason for the stall-out is that the hard economic data continue to be weak, on balance, despite the strength of all the soft, mostly survey data. So while most of the employment indicators confirm that the labor market is very tight, retail sales, particularly auto sales, have been weak. The Atlanta Fed’s GDPNow is tracking Q1 real growth of only 0.5% (saar).
The good news is that this increases the likelihood of a very gradual normalization of monetary policy. Trump has even said that he might be inclined to reappoint Fed Chair Janet Yellen, who is the leader of the gradualists at the Fed.
The 10-year bond yield has responded favorably, having recently peaked at 2.62% on March 13 and falling down to 2.26% yesterday (Fig. 3). Debbie and I are still predicting that it will range between 2.00% and 2.50% through mid-year. Then we see it trading between 2.50% and 3.00% during the second half of the year. That’s because we expect some pickup in economic growth, especially if Trump pushes ahead with his domestic stimulus agenda, as we still expect. In this case, one or two more Fed rate hikes are still likely this year.
One of the softest patches in the US economy right now is the auto industry. Jackie and I have been monitoring the mounting subprime auto loan problem in recent months, arguing that it could weigh on auto sales. That may have started to happen. Consider the following recent developments:
(1) Auto retail sales. During March, US motor vehicle sales dropped 5.1% below the 12-month moving average of 17.5 million units to 16.6 million units (saar). It was the worst month for auto sales since February 2015, and down 9.8% from the cyclical high of 18.4mu at the end of last year. Included in the figure are domestic cars, light trucks, and imports. In the monthly retail sales report, auto sales fell 4.3% over the past three months through March (Fig. 4). This obviously weighed on retail sales, which declined 0.5% over the past two months, but was fractionally higher excluding autos over this same period.
(2) Auto credit. Auto credit conditions are tightening according to the January 2017 quarterly Senior Loan Officer Opinion Survey compiled by the Federal Reserve. The banks responded that they expect to tighten auto loan standards and to see a deterioration in the quality of auto loans during 2017. The net percentage of domestic banks tightening standards for auto loans increased to 11.7% during January, up from -6.3% a year ago (Fig. 5).
(3) Used car prices. Manheim Inc., an auto auction company, compiles a measure of used vehicle prices based on more than 5 million transactions annually. It is available since 1995. In March, the Manheim Used Vehicle Value Index increased only 1.3% y/y and declined 0.5% m/m based on wholesale used vehicle prices adjusted for mix, mileage, and seasonality. The index has declined during five of the past six months. The CPI measure of used car and truck prices has dropped 1.9% over the three months through March and 4.7% y/y (Fig. 6). According to Manheim, dealer incentives to move a high inventory of new cars off their lots has pressured used vehicle values. Recently, Morgan Stanley analysts forecasted that used car prices could fall another 20% from here.
(4) Auto carloads. Railcar loadings of motor vehicles tend to track motor vehicle sales. Both measures had risen steadily from mid-2009 to mid-2015, which appears to have been the peak for both. Since then, loadings (which are available through the week of April 8) and sales have stalled (Fig. 7).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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