The Daily Prophet: Rejoice, the 'Market of Stocks' Has Returned

Connecting the dots in global markets.

Among the many arguments the bears have given for their aversion to U.S. stocks is the very little differentiation there is between winners and the losers. Yes, there been notable leaders (think tech stocks) and laggards this year. But, by and large, it's been a case of a rising tide lifting all boats, benefiting passive investors such as index and exchange-traded funds at the expense of stock pickers.

That, the bears claim, is a sure sign of a market ripe for a correction. The problem for them is that correlations between various stocks and sectors have started to break down, and the market has still continued to advance what is a clear bullish development. According to the strategists at DataTrek, the correlation between the S&P 500 Index and the 10 market sectors outside of tech has dropped to 37 percent, which is a decade low. To DataTrek, that means it's gone back to being a more healthy "market of stocks" instead of simply "a stock market."

Looking at the market that way, no wonder many bears are throwing in the towel. For the first time, money managers who rank as the most skeptical in a weekly survey by the National Association of Active Investment Managers also report being almost fully invested in stocks, according to Bloomberg News' Lu Wang. Normally, the least bullish rung in the survey contains a bunch of managers who are short the market, but last month they were 90 percent long. Elsewhere, a quantitative model developed by Morgan Stanley shows hedge funds are more optimistic on stocks than at any time since the global financial crisis, Wang reports.

The minutes of the Federal Reserve's Sept. 19-20 policy meeting released Wednesday showed officials at odds over whether forces restraining inflation were persistent or temporary. Despite the debate, the central bank at the time decided to reiterate its plan to raise interest rates one more time this year in December. If the Fed sticks to that plan, along with its outlook for three rate hikes in 2018, a growing number of influential bond investors say the potential for a policy mistake rises considerably. Longer-term Treasuries rallied Wednesday, causing the so-called yield curve to narrow. Lacy Hunt, the chief economist at Hoisington Investment Management and a bond bull since 1990, says there's a chance the curve could even invert if the Fed keeps to its forecasts for rate hikes, according to Bloomberg News' Brian Chappatta. An inverted yield curve is notable because it's a reliable precursor to recessions. “We have to be careful in our further moves,” Dallas Fed President Robert Kaplan said at an Aug. 17 event in Lubbock, Texas. “If the curve gets flat or inverted, that historically has been” a sign of economic trouble.  

Maybe it might be better if central banks weren't so open and transparent. Two Swiss National Bank economists, Thomas Lustenberger and Enzo Rossi, argue in a new paper that increased central bank communication over the years has “created confusion rather than clarity” and hasn’t helped investors and academics improve their macroeconomic forecasts. That’s a rebuttal of the view that transparency helps central banks reduce market volatility and achieve their policy objectives, according to Bloomberg News' Catherine Bosley. The financial crisis ushered in a new consensus that giving investors forward guidance to steer expectations for interest rates would help officials navigate the worst recession in a generation. Yet data from 73 countries “warn us that we should not expect too much from greater transparency and enhanced communication,” the economists said. The number of speeches rose almost six-fold between 1998 to 2014 in the economies studied, yet Lustenberger and Rossi found “hardly any evidence” that the increased communication improved the accuracy of forecasts. They found that while 20 of the institutions were at an optimal degree of openness and 23 below par in 2014, 30 central banks were too transparent.

One of the big stories of the year in the currency market has been the surprising rebound in Mexico's peso. Recall that the currency fell out of bed in late 2016 when Trump was elected U.S. president, before starting a long rally soon after the inauguration in late January. A weakening dollar and the realization that the Trump administration's protectionist policies wouldn't be so easy to enact lured traders back into the peso. But the peso, the top performer for the first half of the year, has been among the world’s worst since mid-September as talks to renegotiate the North American Free Trade Agreement drag on and the U.S. and Mexico threaten to quit the deal. At the same time, political developments are helping solidify populist candidate Andres Manuel Lopez Obrador’s front-runner status before the July 2018 presidential election, worrying investors who see him as a threat to the country’s economy, according to Bloomberg News' Aline Oyamada and Daniela Guzman. Peso implied volatility is soaring as the cost increases to hedge against losses surges. The biggest jump in expected price swings is seen in nine-month contracts -- those that come due right around the time Mexicans vote for their next president.

Many U.S. householders may want to stock up on sweaters. That's because their winter heating bills are due to jump as forecasts call for colder temperatures, reports Bloomberg News' Tim Loh. Consumers burning natural gas from October through March will pay an average of $644, up 12 percent from a year ago and 6.7 percent over the five-year average through last winter, the Energy Information Administration said Wednesday in its Winter Fuels Outlook. Heating-oil consumers will pay $1,462, up 17 percent from a year ago. This winter is expected to be 13 percent colder than last, when above-normal temperatures kept heating costs relatively low, the agency said. The chill will be most acute in the U.S. South where temperatures will average 27 percent below last year. The West will be 4 percent colder while Eastern U.S. temperatures are expected to be near the five-year average. Almost half of U.S. households are expected to use gas to keep warm this winter. Demand may increase 9.2 percent from last year, the agency said.


Want to know what Wall Street is really thinking about the prospects for U.S. tax cuts, the bull market in stocks, Fed rate hikes and, of course, the health of the economy? You'll have your chance to hear straight from the heads of America's largest financial institutions starting Thursday when JPMorgan Chase and Citigroup report third-quarter earnings. They are followed by Bank of America and Wells Fargo on Friday and Goldman Sachs and Morgan Stanley early next week. Banks have been on a tear lately on speculation that the Trump administration will name a new Fed chair who will advocate for loosening at least some of the strict regulations put in place after the financial crisis. Over the last month, a Bloomberg Intelligence index that tracks the shares of investment banks has surged 12.3 percent, outpacing the 3.66 percent gain in the S&P 500 Index.

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Federal Reserve Is Ignoring Actual Inflation Data: Tim Duy

Central Banks' Return to Normalcy Is a Big Charade: Mark Grant

What in the World Is Going On With Trump and Stocks?: Justin Fox

Debating Passive Versus Active Investing: Kaissar and Ritholtz

Come On, Bondholders, Give Puerto Rico a Break: Joe Nocera

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