by Umar Farooq
“Global economic policy uncertainty is near 20-year highs while the VIX is nearing 20-year lows. This is an odd configuration for these two series. Usually as economic policy uncertainty moves higher, the VIX moves higher with it. That is not the case today. In the scatter plot below which plots monthly data points for the two series going back 20 years, you can clearly see how the latest data is an outlier. The other three data points surrounding the latest data point are from June 2016, July 2016, and November 2016. Based on the level of the economic policy uncertainty in the world, a regression model would have predicted that the VIX would be pushing 30 instead of hovering around 10. All in all, it would seems more likely to us that the VIX will climb higher to close this gap rather than a swift drop in economic uncertainty.” Eric Bush, CFA
“Several noted economists and distinguished investors are warning of a stock market crash. Jim Rogers, who founded the Quantum Fund with George Soros, went apocalyptic when he said, “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.” Mark Faber, Dr. Doom himself, recently told CNBC that “investors are on the Titanic” and stocks are about to “endure a gut-wrenching drop that would rival the greatest crashes in stock market history.” And the prophetic economist Andrew Smithers warns, “U.S. stocks are now about 80% overvalued.” Smithers backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.” JL YASTINE
In recent days, three industrial bellwethers, Caterpillar (CAT), Ford Motor (F) and Whirlpool (WHR) reported fourth-quarter and full-year earnings on Thursday morning, and unfortunately, investors didn’t like what they saw. These companies’ disappointing results may hint at a larger issue within the U.S. economy and signal an imminent market pullback.
Trump’s election win prompted a great deal of market optimism with the major market indices hitting all-time highs, which many credited to his proposed policies on corporate taxes, regulations and infrastructure. And though most of the gains have come from companies that would benefit from the reforms he promised during his campaign, investors may have pushed stock prices too high too quickly. After the President Trump has taken charge of the office, immigration and trade issues appear to have taken the spotlight, and the odds of a major tax cut or a significant infrastructure bill appear to be sliding. Nearly half of the revenue earned by S&P 500 comes from abroad, so political moves against globalization are bad news for stocks. Declining relations with trading partners, or increased tariffs, would tend to hurt the market even more.
by Umar Farooq