Paint, Grass, and Data

“Investing should be more like watching paint dry or grass grow.  If you want excitement take $800 and take it to Las Vegas ” – Paul Samuelson.

Spoken like the Nobel Laureate he was, Dr. Samuelson’s simple, timeless words of wisdom resound true until this day. Long-term investors should focus on fundamental data rather than short-term market movements, but doing so can be as uneventful as watching paint dry.

In recent years, the financial headlines have been full of reasons why markets were on the brink of the next crash – weak growth, trade war, rising rates, and even threat of nuclear conflict, to name a few.  And while the news stories were sensational on the surface, underlying fundamental data were anything but.  In reality, there was little change in fundamentals and the data consistently indicated continued expansion, albeit at a moderate pace.

But in Q1 2019 there was a sudden change. A number of leading indicators appeared to be reversing their positive trends and confirmation from additional indicators would have been a strong signal for an imminent recession.

New home sales seemed to had peaked and looked to be trending downwards.

Initial jobless claims appeared to had found a bottom and were moving upwards.

And of course, we finally saw an inversion between short and long-term Treasury yields.

But then, as suddenly as it happened, all the indicators quickly reverted back to their positive trends.  In April, new home sales surged and were on track to a new high, jobless claims actually made a new 49 year low, and the yield curve swiftly steepened out of its inversion.  WOW, this is the most excitement we paint watchers have seen in a long time!

As of now, the data tells us the weakness in Q1 was most likely a false alarm, but it is a warning shot none-the-less.  I’m not calling for a top here and now, but as I wrote in March, we are still likely moving into a deterioration process.  That process could unfold as slowly as grass grows, but it’s worth watching.  It may not be exciting, but staying vigilant is more likely to pay out than a trip to Vegas.

Victor K. Lai, CFA