Enis’s Macro Wrap – Feels Like December 2007

by Enis July 11, 2012 7:49 am • Commentary

Markets were quiet again overnight, though risk-on picked up a bit during the European session as peripheral sovereign yields moved lower for the second straight day.  SPX futures are indicating a 0.4% higher open, the dollar is broadly lower, and commodities are broadly higher after yesterday’s selloff.  Asian markets were flat, and Europe is up 0.5%, led by the IBEX in Spain after more austerity measures were announced by Prime Minister Rajoy.  The focus of today will be the FOMC minutes released at 2:00 pm EST.

I mentioned in Quick Hits yesterday that this market felt like December 2007.  I actually mentioned the same idea on Options Action on Friday.  Why do I keep harping on this point, and why December 2007?

  • The last recession started in December 2007, but that was only known months after the fact.  I think the chances of a recession are much higher than the market is pricing in now.
  • The S&P 500 was less than 5% from its highs, similar to this month’s peak.  There was ample talk of further central bank action and easing “saving” markets.  Interest rates would go from 5% to near 0 for both the U.S. and Europe over the next year, but stock markets still fell significantly.
  • The housing market had been falling for more than a year, with bankruptcies by home-lenders like New Century and Fremont at the beginning of 2007.  This time around, European sovereign and banking weakness have been with us for more than a year.
  • Defensive sectors had started to strongly outperform the market.  XLU actually made an all-time high on Dec 14, 2007.  XLU’s current high was set last week on July 3rd.  Similarly strong price action then and now in XLV and XLP.
  • Meanwhile, half of the major cyclical sectors were trading below their 200-day ma.  This time it’s XLE, XLI, and XLB as commodities are leading the weakness.  That time, it was XLF and XLY as housing was leading the weakness.
  • Economic data had turned lower in the middle of 2007, just as our economic data has turned meaningfully weaker in the last 3 months.

History does not repeat, but it does rhyme.  This is a much different global economic backdrop than 2007.  Sources of economic weakness are in different sectors and geographies.  But the price action I’m seeing is suggesting further stock weakness ahead.

Someone asked me, am I suggesting the SPX index will go to 700 like in the last bear market?  No.  I’d rather focus on the next month or two than lock myself into a long-term view.  In the near term, the market feels far too complacent in the face of potential future headwinds.  This market is no longer a “close your eyes and buy the dip” market.  So keep your eyes open.