Are Markets In For A Change?

Markets appear to have bounced back with some softening of tariff news. Breadth in equities has improved leading us to believe there is change in the air.

This week's musings is inspired by the 1979 song, "Cool Change" by the Little River Band. Here’s some trivia about the song:

• This song was the second single released from the band's fifth album "First Under The Wire." The Little River Band hailed from Australia and the fact that this song wasn't released in Australia probably hurt its sales. Regardless, the song reached #10 on the Billboard charts and sold an estimated 500,000 copies.

• The song was written by lead singer Glenn Shorrock at a time when tensions were high in the band. Shorrock has relayed that he and guitarist Graeham Goble had many squabbles. This song was a wish to get away for some tranquil time by himself.

• This song is representative of the music genre "Yacht Rock." The music style emerged from 1976 and 1984, characterized by a smooth and melodic sound combining elements of jazz, R&B, and rock. Yacht Rock became popular in the 2000's helping revive the music of the Little River Band.

• Some of the other acts associated with Yacht Rock include: Michael McDonald, Kenny Loggins, Christopher Cross, Steely Dan, Toto, and The Doobie Brothers. Some say the song "What A Fool Believes" epitomizes Yacht Rock. (see the Netflix documentary, "Music Box: Yacht Rock" to learn more)

"If there's one thing in my life that's missing

It's the time that I spend alone

Sailing on the cool and bright clear water

There's lots of those friendly people

They're showing me ways to go

But I never want to lose their inspiration

Time for a cool change

I know that it's time for a cool change

And now that my life is so prearranged

I know that it's time for a cool change"

Here's what we've seen so far this week..

Messaging Prearranged? A general perusing of the financial media will take one down a dark path pretty quick. As they say, "If it bleeds, it leads." That has been

the case for weeks now as trade wars have helped spark a negative news cycle. However, the narrative may have to change in light of recent market activity. This week, equities reached a highly-watched technical signal that has proven very bullish. The Zweig Breadth Thrust is an indicator developed by Martin Zweig to measure how quickly sentiment in the stock market shifts. The long and short of it is that when a vast majority of the stocks on the New York Stock Exchange move higher within a 10-day period, it signals a change in breadth. This week, that indicator triggered. There have been 18 triggers of the indicator since World War II, with the S&P 500 Index providing a positive return 100% of the time 6 months and 12 months later. The average return over those 12 month periods is 24%.

As investors adopted a "risk-off" attitude in March and April, credit spreads naturally expanded. Prior to recessions, the credit spread index spikes, as it did from mid-February to early April. Most recently, as volatility began to settle lower and the de-leveraging process ran its course, credit spreads have narrowed, indicating that risk is easing. In fact, the recent spike in the index has been much lower than prior recessionary periods.

We often cite the Chicago Fed's National Financial Conditions Index on this blog as a means to see the forest for the trees. The index has consistently remained below zero, meaning financial conditions are favorable and/or stable. A subindex of the National Financial Conditions Index is the Credit index. Just as credit spreads are indicating, the Credit subindex is no where near levels seen prior to recessions. So, while financial media continue to stoke fear, it's possible the markets are telling us the worst is over. That doesn't mean volatility is gone. The VIX Index, which measures volatility, remains elevated (26.4) above it's historical average (19.5), but has subsided from peaking at 52 just a couple of weeks ago. As long as tariff headlines scroll across investors' screens, trading is likely to remain choppy.

Cool Change? While the markets have experienced some changes, the economy doesn't appear to have experienced much in terms of drastic changes.

Redbook tracks data from over 9,000 large retailers and same-store sales each week on a year-over-year basis. The most recent reading this week was +7.4% in sales. The historical average, going back to 2005 is 4.4%. As long as Redbook Sales remain at current levels, consumer spending (which is nearly two-thirds of GDP) should remain a positive contributor to economic growth.

There continues to be disparity between 1st Quarter GDP expectations - something we've touched on a lot the past few weeks. The Atlanta Fed is projecting -2.5% for economic growth (or lack thereof). Yet, both the NY Fed and St. Louis Fed are projecting +2% for Q1 GDP. A more timely index, the Weekly Economic Index, which measures more than 10 daily and weekly economic data series, is showing +2.68% growth and has been around that number for much of the 1st quarter.

Despite the constant fear over tariffs, apparently retailers are expecting greater consumption of durable goods moving forward. The preliminary reading on Durable Goods Orders showed a 9.2% increase for the month of March, which translates to an 11% increase on a year-over-year basis. That is a considerable jump from February's reading of +0.9%. Durable Goods Orders measures the change in value of new orders for long lasting manufactured goods, which typically includes appliances, vehicles, machinery, and aircraft. Perhaps it's time for investors to spend some time alone and allow for a cooling off period instead of worrying about each and every headline.

Time for a cool change...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

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Past Performance does not guarantee future results.