Investing Environment Review and Outlook

Investing Environment Review and Outlook – Volume 27

This month there is much to discuss: equity sentiment extremes, a bond rating improvement, the yield curve inversion and the trade war. However, recent economic releases like the May ISM index confirm moderate to slow growth and no inflation pressure. A good environment for stocks. The equity rating remains a bullish 5. We are raising the bond rating to a 2 from a 1. Gold and commodity ratings remain at 4.

Equity Sentiment Extreme

After the 6% S&P 500 decline in May, equity sentiment shifted dramatically from a majority of groups that were optimistic (on May 7th) to 7 of 8 groups pessimistic on June 4th. This kind of sentiment move is meaningfully bullish if fundamental market conditions are positive as they are now. They are also normal pull backs following prior severe liquidations like we saw in December. These investor groups have likely cut their allocation to stocks, building up cash to drive the next rally.

Economic Outlook Weaker: Bond Rating +1 to 2

Our economic outlook weakened in May to 38 reading due to weaker commodities like copper, lower interest rates and lower stock prices. Following this signal, the ISM manufacturing report, the best coincident U.S. economic indicator, declined slightly to 51.2 in May, a level consistent with slow to moderate growth. In this environment, it is less likely long rates will rise and bond prices will decline. As a result, we are raising the long-term bond rating to a 2 from a 1 last month. If economic indicators remain weak, we will raise the rating further since it would increase the odds interest rates will continue their decline.
The 10-year yield is down 1.2% in just 6 months as trade war rhetoric focused attention on an old story, the slowing economy. There are now 3 cuts expected in 2019, an extreme view considering economic indicators like the ISM index and Consumer Confidence are not signaling a recession. If however, economic outlook and inflation indicators continue deteriorating, we will move the bond rating further.

Yield Curve Inversion

The 10-year yield declined 0.20% below the 3-month yield in May, a condition known as a yield curve inversion. It only happens 10% of the time because normally long term yields are higher than short term rates to compensate for the uncertainty. For stocks it becomes meaningful when the inversion is more severe. For instance, when the 10-year yield was more than 50 bps below the 3-month yield, the S&P 500 returned -11% since 1962. That compares to a +11% return when the curve was inverted but less than 50 bps as it is now. A bigger inversion signals the Fed is tight by holding short term rates too high relative to the 10-year yield, and a tight Fed is negative for stocks and the economy. For now though, it is not extreme, and 2% inflation means the Fed has room to ease as needed. In addition, our inflation outlook model is neutral, showing no pipeline pressure on inflation yet. In 3 of the 4 most recent cases, the yield curve inversion was followed by the Fed cutting rates.

Trade War Interest Fading

According to Google Trends, interest in the Trade War is fading, similar to prior spikes in April and July of last year. Political events like this are nearly impossible to use as investment data points because in a single Tweet they can and do change without warning. However, trade is clearly a key component of the world economy. According to the World Bank, world trade accounted for 58% of world GDP in 2017 up from 38% in 1990 and 26% in 1970. This implies a trade war could significantly cut growth, and there is evidence it is already affecting the economy. For instance, U.S. imports from China declined 18% Y/Y in March, down from 10% Y/Y growth last year and close to the 2008 decline. However, total imports to the U.S., a good coincident economic indicator, were ok at 0.2% Y/Y. As recently as 2016 total imports were worse, down 10% Y/Y. So far, trade declines are consistent with a mid-cycle slow down.

1906 Global Tariffs

For historical perspective, this chart shows that in 1906 tariffs over 20% (dark green) were the norm globally.

Despite the potential headwinds of a prolonged trade war with China and the inversion of the yield curve, conditions for equities remain bullish. We currently remain less optimistic on the prospect of long-term bonds with a 2 rating. If however economic indicators remain weak, we will raise our rating further since it would increase the odds interest rates will continue their decline.



This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2019

Brenton Point - Careers

Michael Schaus

Director of Market Research

Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…


Check out our services!


Download PDF


Sign up!

Sign up for our monthly newsletter and get the lastest news and research from our esteemed advisors here at Brenton point. Right into your inbox!