For the past several months, we at TrendVesting have been sounding the alarm of a pending sell off; one that will be outside of the typical “V” dip that we’ve seen over the last few years. Early warning signs presented itself in October 2018 despite markets rebounding in typical “V” like fashion. By May 2019, markets returned to previous highs and by the end of July had appreciated another 3% setting an all time high for both the Dow Jones Industrial Average and the S&P 500.
It was late June 2019 when we felt market irrationality reached a new level as the bullish trend continued off news of a tariff cease-fire between U.S. and China. Markets praised the improved rhetoric; however, we saw this as no material improvement to getting a signed trade deal; just a matter of kicking the can down the road. For months now, U.S. and China have been at odds with respect to intellectual property, market access and agriculture. The fact that these talks have extended for such a length of time show the two countries are nowhere near a deal. Some argue a deal will come as it’s in President Trump’s best interest going into an election year; the matter of the fact is that China has been vocal on not being pressured into signing a deal that does not benefit them. It’s highly likely that negotiations between the two Countries will lead to an all-out trade war, however, there is a possibility a trade deal gets signed so that President Trump can campaign off of this accolade in the upcoming 2020 elections. Whether a signed trade deal is a favorable one to American’s is another story.
On the economic front, the U.S. seems to be running out of steam. The recent rate cut by the Feds may have been a welcomed stimulus, however, investors didn’t appreciate Chairman Powell’s commentary that the cut was a midcycle adjustment. The reality of the matter is the Feds have few levers left to pull in the event of a recession like event and they certainly don’t want to go back to the QE cookie jar. They also don’t want markets to be pricing additional rate cuts so they’re doing everything they can to temper expectations and grab at whatever data they can to steer towards continued rate increases. The problem is that inflation has flatlined, wage growth is stagnant and labour participation is near decade lows, hardly the conditions for continued rate increases.
The fact that markets continue to rise given the above, leads us to believe we’re nearing peak market irrationality. Couple this with a number of worrisome Google Search Trends (as determined by Google Trend) we feel that this is a dangerous time to be holding/accumulating U.S. equity exposure.
Noted below are a few of the narratives that have presented themselves in Google Search Trend data:
UNEMPLOYMENT RATE SET TO INCREASE
As the administration of unemployment benefit programs are increasingly being managed online, an increasing trend in searches for “Unemployment Benefits” are understood to represent higher unemployment benefit applicants and conversely, a decreasing search trend would represent lower number of unemployment benefit applicants. U.S. searches for the term “Unemployment Benefits” and “Unemployment Help” have trended negatively since 2008/9 which corresponds to the recovery of the U.S. economy since the Great Recession of that time. However, an alarming trend over the last few months has presented itself. Since October 2018, the search trend appears to increasing suggesting an increase in the unemployment rate from it’s current historical lows. Now you might be thinking, we’ll this is a great sign for investors as the Fed will likely be in a position to be cutting interest rates. The problem with this thinking is that with the current interest rates, there isn’t much to cut in the face of a recession, not to mention, the watered-down affect on the broader economy that interest rate decisions has generally had over the last few years.
RECESSION CONCERNS GROWING
The increase in searches for “Recession” since late 2017/early 2018 is a concern. In part because this search behavior reflects the increasingly negative sentiment towards the U.S. economy. Increasingly negative sentiment lends itself well to to a greater sensitivity and volatility to negative market news, whether that take the form of trade talk breakdowns, Iran/DPRK Nuclear concerns, Russia, etc.
MARKET SENTIMENT TURNING NEGATIVE
When markets bullish and investors are seeing their portfolios increase, complacency sets in and there is less of an incentive to refer to market news, conversely, when markets are volatile, the likelihood is greater to check in on market news. What we’re seeing is a growing trend in searches for select financial news outlets, understood to represent an increasingly negative market sentiment. Comparatively speaking, we saw a similar increase in this trend in the run up to the 2008 market crash.
Markets have already started to rebound from 2019’s most volatile market session, seeing the Dow Jones Industrial Average drop 767 points but don’t let this fool you, the data points to signs that there is further market pain to come.
Be cautious and happy trading.