MorningWord 11/28/14: Thankless Skepticism

by Dan November 28, 2014 9:42 am • Commentary

Like most of you, I am Thankful, for a loving family, pretty good health and being born in America.  But beyond that, to proclaim being thankful for anything material, I’d sound like nothing short of an A-hole.  I was certainly happy for three consecutive NFL games yesterday, and a day off in the work week, but we all had that coming, so I’ll just chalk that up to greedy entitlement.  As far as getting back to the markets for a half day today, I’ll just say this, sometime this can be a thankless profession.  

After a day of ingestion and reflection, and thinking about the homestretch into year end, I thought it would make sense to list a handful of themes that our equity markets have generally disregarded to date in 2014, but are likely to take centerstage in 2015 coming off of all time highs, resulting in the very least of increased volatility of risk assets.  Here we go:

1.  U.S. equities have been perceived a ‘safe-haven’ risk asset, and thus in my mind is a very crowded trade, despite weakening breadth.

2. Dollar strength against most major currencies is likely to continue given divergent central bank policies in the developed world.  It is also likely to be a large drag on U.S. multi-nationals profits.

3. The U.S. economy (despite a revised Q3 GDP print of 3.9%) is not likely to be able to remain decoupled from what appears to be a weakening globabl economy.  European PMIs are at at least 52 week lows, while Chinese PMIs are at 6 month lows.

4. Lower oil is not a ‘tax break’ for the U.S. economy as a whole given the importance of the energy sector for new investment.  The slight gains for consumers in a potentially deflationary economy that has shown paltry employment gains and no wage growth is a positive, but possibly offset by the hit from the energy sector and its offshoots.

5. Record retail sales in the current holiday season will be nothing to cheer on the profit front as this is likely to be the most promotional period in history yeilding very weak profits, and setting the stage for perpetual discounting and significant inventory reduction in Q1.

6. Ummm U.S. Treasury Bond Yields, and the spread between that of Soverign debt in Europe, may be the real tell as to the attractiveness of risk assets in this environment.

7.  Russian difficulties on all fronts.  Oil’s decline is adding salt to the wounds as the sanctions were already a pain for the Russian economy.  If Putin feels backed into a corner, he might get more aggressive regarding Ukraine and other former USSR countries.  The Russian Ruble is making another new all-time low vs. the Dollar today.

8.  Defensive sectors might continue to outperform in 2015 considering the alternatives.  Healthcare and utilities are the best performing sectors in 2014.  Which sectors are going to take up the baton in 2015? Energy looks unlikely, materials looks unlikely, financials could struggle given rates remaining low, which leaves technology, industrials and consumer discretionary among the cyclical sectors as the possible candidates.

9.  High yield markets are going to feel more pressure in 2015, particularly from the large amount of issuance in the energy sector.  Worth watching if that has any knock-on effects on the financing market as a whole.

10.  Even as the S&P 500 index has nearly doubled in the past 3 years, daily volatility has been low throughout.  Does the recent increase in commodity and currency volatility signal increased equity volatility in the months to come?

Its times like these proffessionally I am Thankful for my predisposition to be just a tad skeptical of the prevailing market wisdom.