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Stocks Have a Lot to Be Thankful For. Seriously.

Robert Burgess
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Stocks Have a Lot to Be Thankful For. Seriously.

(Bloomberg Opinion) -- Equity markets fell again Tuesday, pushing the MSCI USA Index of equities back into the red for the year. The reasons included concerns about what the collapse in oil prices means for energy companies and the usual worries about slower economic growth. Those may just be convenient excuses for the daily move, but the truth is that it’s hard to get excited about stocks when hedge fund titan Ray Dalio sees “low returns going forward for a long time” and Goldman Sachs says it’s time for investors to boost their cash holdings. Even so, all hope is not lost for the bulls.

Much has been made about the coming slowdown in earnings growth, especially for high-flying technology stocks, and how that has weighed on valuations. But the thing to know is that earnings growth for cyclical sectors, which include tech shares, should outpace their counterparts in defensive sectors for the foreseeable future, according to Bloomberg Intelligence. In other words, the trends that led to the gains in stocks for much of the year before October remain largely in place. Another thing that has the stock market worried is the weakness in credit markets. Bloomberg News reports that corporate bonds are poised for their worst year since the global financial crisis. And while that is true in terms of returns, yield spreads for investment-grade debt are still only at about 1.30 percentage points, not too far from the recent lows of just less than 1 percentage point earlier this year and far from the recent high of more than 2 percentage points in early 2016, as measured by the Bloomberg Barclays bond indexes. That’s helping keep financial conditions from becoming too tight. The Goldman Sachs U.S. Financial Conditions Index sits right at its average from mid-2015 through mid-2017, when the MSCI USA Index of stocks rose 16 percent.

It’s not as if anyone is calling for a recession anytime soon, especially with the unemployment rate holding below 4 percent and wages starting to pick up. Still, few think the type of indiscriminate buying that lifted most all stocks is poised to return, which is a healthy development. “The easy days of long, global bull markets where you can invest in a tracker for five basis points — I say this as an active fund manager — and watch the thing go up, I think those days are gone,” Gerry Grimstone, chairman of Barclays Bank PLC and Standard Life Aberdeen PLC, said in an interview on Bloomberg Television.

BOND BULLS ARE THE MAJORITYThe government bond market is also flagging some potential good news for equities. A widely followed JPMorgan Chase & Co. survey showed that investors are net bullish on U.S. Treasuries for the first time since March 2017. While that usually means bond investors are generally negative about the economic outlook, it also means they see yields dropping. That’s important because the swift rise in yields between late August and early October garnered much of the blame for the softness in equities. So it stands to reason that lower yields should provide some support to the stock market. It also means that bond traders see a higher chance that the Federal Reserve slows the pace of interest-rate increases. Also recall that a hawkish central bank has also been blamed for the rout in stocks. By some measures, the money markets are pricing in only 1.5 rate increases from the Fed through the end of 2019, compared with the Fed’s projections of four hikes. To be sure, the recent drop in 10-year Treasury note yields to 3.03 percent on Tuesday from 3.25 percent earlier this month hasn’t helped stocks, but that could change if the yield dips back below the psychologically important 3 percent level.

AT LEAST GASOLINE IS CHEAPERThe other potential bit of good news for equities stems from the energy markets. West Texas Intermediate crude prices tumbled as much as 7.03 percent Monday to as low as $52.77 a barrel. That brings its decline to 30 percent since early October. The reasons for the plunge include a glut of supply coupled with declining demand, which is not an up arrow for the economy. But it is an up arrow for consumers heading into the holiday shopping season, as the drop in oil prices has dragged gasoline prices down as well. The price of a gallon of regular-grade gasoline in the U.S averages $2.612, down 36 percent from this year’s high of $2.971 in late May, according to the Automobile Association of America. With the unemployment rate below 4 percent, the U.S. holiday shopping season is expected to be among the best in recent memory, with sales up 5 percent or more, according to Bloomberg News’s Matthew Boyle. But on Wall Street, shares of retailers have been hammered amid anxiety about whether this is shaping up to be “Peak Christmas,” with retailers spending too much to outdo one another on free shipping and expanded gift departments just as sales growth begins to subside. “Market expectations in this environment are high,” said Oliver Chen, an analyst at Cowen.

CRUDE CRUSHES THE KRONE The drop in crude oil prices is having a negative effect on the Norwegian krone. Until mid-October, the currency had been one of the few to gain against the dollar this year. But over the last month, it’s one of the worst performers. The Bloomberg Correlated-Weighted Index for the krone, which measures the currency against nine other developed-market peers, has dropped 3.96 percent. As a large oil producer, Norway’s economy is tied closely to the price of crude, so much so that currency traders are starting to worry about the timing of the next interest-rate increase by Norway’s central bank. Options betting on volatility in the euro-krone exchange rate over one month have risen to the highest level since September ahead of the next policy meeting on Dec. 13, according to Bloomberg News’s Love Liman. Even before the recent slide in oil prices, Norway’s economic growth had slowed. Mainland gross domestic product, excluding oil and shipping, rose 0.3 percent in the third quarter. The median estimate among 13 economists surveyed by Bloomberg was for growth of 0.5 percent, while the central bank forecast 0.7 percent growth.

INDIA TURNS IT AROUNDEmerging-market investors were keeping a wary eye on India in October as the rupee showed signs of entering into a free fall. Officials were so desperate to stop the decline that Prime Minister Narendra Modi’s government was considering tapping Indians living overseas to lure foreign-exchange flows and prop up the sagging rupee. A little more than a month later, things are looking much better for India and its currency. The rupee rallied on Tuesday for a sixth consecutive day, its longest winning streak in more than a year, after the central bank signaled a compromise with the government in their dispute over reserves. The Reserve Bank of India and the government have been sparring over how much capital the central bank needs and how tough its lending rules should be, according to Bloomberg News’s Kartik Goyal. At a board meeting Monday, the RBI agreed to form a panel to study a demand for sharing part of its capital. “The setting up of a committee to examine reserves management does not automatically mean reserves will be utilized by the government, thus alleviating some market fears,” Mitul Kotecha, senior emerging markets strategist at TD Securities, told Bloomberg News.

TEA LEAVESThe Organization for Economic Cooperation and Development is due on Wednesday to give an update on its forecast for the global economy. The news, to be released in Paris, isn’t likely to be good. At its last update two months ago, the OECD said it trimmed its estimate for global economic growth this year by 0.1 percentage point to 3.7 percent and by 0.2 percentage point in 2019 to 3.7 percent. “Global growth is hitting a plateau,” its chief economist, Laurence Boone, said at the time in an interview with Bloomberg Television. Since then, the economic data has consistently come in below projections by a greater degree, according to the Citigroup Economic Surprise indexes.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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