Phil Davis has a great post this morning (07.23.14) where he discusses the financial media’s distorted reporting of GDP growth in the US and around the world. He specifically cites a Bloomberg article that references “accelerating growth.” Let’s look at a couple of graphs and watch as GDP growth accelerates. First graph below shows quarterly GDP growth in Japan, the UK, Germany and the US since the 4th quarter of 2009.
Does everyone see which country is driving the “acceleration?” Yep — Japan and its Godzilla-size QE experiment. Next let’s take a look at the weighted average growth rate of the 4 countries (the US consistently accounts for 60% of the total GDP of all 4 countries). Japan’s 1-quarter bolus to the “acceleration” of GDP growth has lifted the average all the way to a spectacular . . . 1.4%. (Yes, the rates are annualized.)
Let’s add a trendline to the above graph and have another look:
Adding to Phil’s point: if the trendline points downwards, but the financial media calls it accelerating, then it must be so. Dissent at your own peril.
Markets in “Risk-Off” Mode for First Half of 2014: Utilities and Large-Cap Stocks Lead as Interest Rates Decline
As we begin the second half of 2014, let’s take a look back at how equities and interest rates performed in the first half of the year. The first chart shows that U.S. large-cap stocks (the S&P 500) posted strong gains of about 7% in the first half, but small caps (the Russell 2000) lagged with a total return of just under 4%.
When large-caps lead small-caps we usually think the market is in a bit of a “risk-off” mode, which is confirmed by the gradual decline in the 10-year Treasury note yield, shown in the chart below. Despite the chants of “great rotation” from the financial media, the long-predicted rise in interest rates has not yet materialized.
Utilities led the way as investors reached for yield, with Energy and Materials stocks posting strong gains, most likely in anticipation of the highly-touted expected increase in inflation that has also failed to materialize:
Overall, investors were handsomely rewarded in the first half of 2014, considering that U.S. stocks rose 30% in 2013. But the market’s internals are weakening, as investors repositioned to play defense in the second half of the year. Now that former doves like the St. Louis Fed’s Jim Bullard are arguing for the Fed to exit markets sooner rather than later, expect an immediate increase in volatility at the first sign that the Fed is actually backing off. But it’s important to note that thus far the Fed has only talked about accelerating the taper. As pointed out by Phil Davis today, the Fed continues timing its cash injections to aid end-of-quarter window dressing. What would stock values look like in a market that was not supported by the Fed? It’s been a long time since we’ve had an answer to that question — so long that many have probably forgotten the concept altogether.
[Data from S&P’s Capital IQ]