As I watched U.S. equities melt-up in response to another round of “China Trade Optimism” while President Trump patted his own back on a job well done, the thought that kept circulating through my mind was it’s beginning to feel a lot like 2007.
For those who don’t recall, from February 2007 until December 2007, there were once in a lifetime, or once in a decade, events occurring about every three weeks:
Here’s a brief recap:
February 2007: HSBC Bank announces losses due to U.S. subprime lending.
May 2007: Federal Reserve Board Chairman Ben Bernanke acknowledges mortgage defaults but says it won’t impact the economy.
June 2007: Two Bear Sterns hedge funds that invest in subprime go belly up.
August 2007: The European Central Bank begins pumping money into the EU banking system because liquidity is an issue.
August 2007: The Federal Reserve cuts rates by 50 basis points and warns that credit issues could be a risk to economic growth.
September 2007: The London interbank offered rate (LIBOR), the rate at which banks lend to each other, hits the highest level in a decade.
September 2007: Just one month after its first-rate cut, the Fed cuts another 50 basis points.
October 2007: The S&P 500 surpasses the March 2000 high, minting a new all-time high.
October 2007: UBS announces a $4 billion loss due to U.S. subprime.
October 2007: Merrill Lynch CEO resigns because of an $8 billion subprime loss.
December 2007: Fed coordinates with five other central banks to provide billions of dollars to banks globally.
Dec. 31, 2007: The S&P 500 is just 4% below its October all-time high.
Now you can argue that the data we see now doesn’t mirror the subprime crisis, and that’s fair. But what’s also fair is that while this timeline of events was occurring in real-time, no (mainstream analysts) had any clue that they were leading indicators of a global financial crisis, which is why markets continued to climb higher and higher, blissfully unaware.
Similarly, today, the vast majority of investors are ignoring the data and letting FOMO (fear of missing out) drive their investing decisions.
Now, I’m not suggesting that we are setting up for a financial crisis in 2020. That said, there have been many economic data sets hitting “only seen before or during a recession” levels, and we are now experiencing a real disconnect between U.S. financial markets and the growth slowing Fundamental Gravity reality, just like in 2007.
I have no idea how much longer stocks can ignore the earnings recession across four sectors of the S&P 500 (energy, basic materials, consumer discretionary, and technology) or the plethora of deteriorating macroeconomic data. I also have no idea when a China deal gets done or when people will realize that the “done deal” merely puts us right back to where we were two years ago before this hand measuring contest between Trump and Xi began.
However, what I do know is that buying into U.S. equity all-time highs against a Fall Fundamental Gravity environment has historically been a recipe for giving your portfolio the woodshed treatment.
I won’t be backing up the truck on the SPDR S&P 500 ETF Trust (SPY) or any growth-related sector in the U.S. equity market. We’ll continue to buy our U.S. Shift Work Focus Markets on pullbacks as well as adding to our long exposure in markets associated with the new Reflation Elation macro theme because those markets will get us paid with or without a trade deal, and with a lot less drawdown risk.