Shanghai shares are now below 2015 levels. Photo: iStock
The Shanghai stock exchange. Photo: iStock

The star performer among world markets Tuesday was Germany’s DAX index, led to a 1.13% gain by automakers and capital goods exporters: Daimler (+3.44%), Bayer (+2.45%), BMW (+2.09%), Continental +2.08%, Infineon (+1.7%) and Volkswagen (+1.65%).

This seems to be a spillover from China. German carmakers cut prices to Chinese buyers after China reduced the VAT tax, passing the tax benefit on to consumers. The ZEW economic survey’s current conditions index came out worse than expected while the ZEW expectations survey came out better, but the price action in the German market probably reflects China.

I suggested on February 25 that some European industrials might be a cheap way to buy into Chinese growth, noting that “investors who want to benefit from renewed optimism about the Chinese economy might consider the stocks of international companies with a big presence in China. […] Volkswagen, the best-selling nameplate in China, rose over 3% in Germany today, and Daimler Benz rose 2.4%. Other European stocks with heavy China exposure included Henkel AG, Airbus, SKF (Sweden), ABB, Alfa Laval, and Hexagon AG.”

Airbus has been a top performer recently; the Swedish heavy-industry names have lagged. 5G stocks, though, continue to perform very well. I wrote about a “stealth rally in 5G stocks” on February 13. Ericsson, Huawei’s competitor (and more often partner) in 5G rollouts continues to perform well.

The US market is all over the map. Consumer names have been among the worst performers, with retail and consumer staples at the bottom of the return distribution, and technology, semiconductors and biotech at the top. (It should be kept in mind that the violent move upward followed an even more violent move downward; biotech is still trading about 10% lower than its September 1, 2018 level).

This contains important information for the Federal Reserve’s deliberations today and tomorrow (although there is, of course, no guarantee that the magi of the Federal Reserve staff will know how to interpret the handwriting on the wall).

All the recent data on household spending show a pullback in household spending.  The consumer accounts for 70% of GDP, and the first-quarter air pocket in GDP growth is largely due to household restraint. Both the Census Bureau estimates for December and January retail sales and the Commerce Department report on December personal spending showed significant drops.

The one outlier was the Johnson Redbook survey, which showed much stronger retail sales than the government data. According to the Census Bureau, retail sales in January were barely 2% above the year-earlier level, which is to say dead flat in real terms.

It turns out, though, that Johnson Redbook lags the Census Bureau retail sales series. That’s not what is supposed to happen, but it is what actually does happen. That is, future values of the Johnson Redbook data are highly correlated with present values of the Census Bureau data.

US household behavior is the hardest economic variable to forecast. There are a lot of reasons for households to be cautious. Here are a few I’ve cited in the past:

1) Although the US is generating more than 2 million new jobs a year, more than 100% of last year’s new jobs came from small businesses, which offer lower pay and much less economic security than large corporations. Survey data show that Americans are far less confident that jobs will be available six months from now, and that concern motivates precautionary saving.

2) The top-rated consumers are able to get mortgages and credit-card lines, and banks are rationing revolving credit by charging the highest credit card interest in history, despite the historically low level of other interest rates.

3) In the few categories of lending in which consumers with a low credit rating can obtain loans, for example, auto financing, delinquency rates are now among the highest in history.

If the consumer sector is weak, the capital investment picture is even weaker. The Fed’s index of US manufacturing output has fallen for two months running. Today the Commerce Department reported a second monthly fall in succession in durable goods orders excluding transportation. Capital goods orders showed a modest gain in February, but the three- and six-month moving averages both are negative for nondefense capital goods orders excluding transportation.

As I noted yesterday, a large part of the decline in capital goods orders is due to sharply reduced spending on oil drilling. That was supposed to be the US economy’s greatest success story, but it has been attenuated by inadequate transportation infrastructure.

Deflated by the producer price index for private investment goods, the volume of outstanding orders for capital goods remains lower than it was five years ago.

I continue to expect US economic growth for 2019 of around 1.5%, versus 3.0% last year, with pressure on corporate profit margins.

All of that leaves me less than enthusiastic about the US market. The biggest thing that US equities have by way of support is a Federal Reserve that is worried about the strength of the US economy, and with good reason.

Leave a comment