Sunday, February 01, 2015

Five Macro Themes Dominating the Markets

So let's take stock of the markets after the first month of the new year, making use of several worthwhile visualizations from the excellent FinViz site.  Here are a few themes that pop out:

1)  Increase in uncertainty - The rise in VIX has been outstanding.  Volumes in stocks have picked up significantly, leading to much greater volatility.  SPY daily volume averaged about 109 million shares in 2014.  Thus far in 2015, we're averaging about 159 million shares.  That rise represents the increased presence of longer time-frame participants acting on global macroeconomic shifts.  The rise in gold also reflects investor uncertainty.  With rates going to zero and lower around the world, the lack of yield from owning gold goes away as a reason to not be an owner. 

2)  U.S. dollar strength - With the exception of the Swiss currency (CHF), just about every major currency has been significantly weak with respect to the U.S. dollar.  The top chart shows USD as one of the few winning groups on the month.  The central bank moves toward easing--in Japan, China, Europe, Canada, and more--combined with talk of a normalization of U.S. rates and an end to QE have created a situation in which the dollar has been king for seven consecutive months.

3)  U.S. fixed income strength - With rates around the world going to zero--and even negative--the seemingly paltry returns in the U.S. bond market suddenly become attractive.  The uncertainty in stocks also contributes to a safe haven play in rates.  Some of the best relative performers among stocks for a period of months have been higher yielding shares, such as utilities and consumer staples shares.  In a world where safe guaranteed returns are going away, yield and carry become attractive.

4)  General commodity weakness - It's not just crude oil; commodities have been weak across the board, from ags to base metals (copper) to a variety of energy products.  The deflation concerns globally have not abated despite central bank actions; weak demand spawns weak commodity prices.  The inability of many global stock markets to make new highs when SPX hit its peak this past December speaks to concerns regarding global recession.

5)  U.S. stock weakness - This perhaps has been the greatest surprise.  The U.S. was supposed to be an island of economic strength amidst the global weakness.  With a strong dollar and good relative yield, why wouldn't international investors flock to U.S. equities?  A look at the middle and bottom charts shows that growth stocks--consumer discretionary shares and technology names--have been beaten up lately.  International companies that depend upon exports are doubly hurt by global recession and the surging dollar.  The weakest sector for the month?  It's financial shares, not the beaten up energy names.  Check out banking names in Canada; a weakening economy combined with increasingly shaky energy loans has created real turmoil in that sector.  The dynamics may not be so different in the U.S., as the headwinds from a rising dollar may be more than offsetting any benefits of low gasoline prices to consumers.

Bottom line is that we're seeing substantial risk-off dynamics across markets and regions of the world.  Stock market breadth has been weakening; volatility has been on the rise.  Should stocks weaken significantly and energy sector related weakness and dollar headwinds threaten U.S. growth, we could hear a very different tune from the Fed than has been anticipated of late.

Further Reading:  The Weak Breadth in Stocks