Fewer Stocks Are Experiencing Positive Revisions in North America

Over the past several years an interesting pattern has emerged in North America regarding sales and EPS revisions. During the first half of the year, analysts broadly raise sales and EPS estimates as the consensus outlook of the economy becomes increasingly more optimistic. However, as growth fails to meet expectations and second half of the year growth expectations are brought back to reality, the number of stocks with increasing EPS and sales revisions declines significantly.

In the chart below we show three data points. The dark blue line is the percent of stocks in the MSCI North America that have seen their sales estimate revised upward versus six months ago. The red line is consensus economics year-over-year real GDP growth estimate for the calendar year for the United States. The light blue line is the actual year-over-year change in real GDP for the United States.



There have only been a handful of quarters over the past seven years where the (revised) real GDP growth surpassed the expected GDP growth. This happened most notably in the 4Q 2013. we would say looking at the previous chart of sales estimates and the next chart of EPS estimates, it is safe to assume that the number of stocks with positive revisions will be declining significantly over the next 6-8 weeks.

20% Of European Stocks Are In Bear Market

The correction in Europe has been swift and broad. 20% of the MSCI Europe index are at least 20% off their 200-day high or put another way 20% of all European stocks are officially in a bear market. Almost two thirds of all European stocks are at least 10% of their 200-day highs. Finally, perhaps the most eye opening stat of all is nearly half of all European stocks are at least 10% lower than their 50-day high.

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Small Cap Performance Suggests Another Leg Of Counter-Cyclical Leadership

Liquidity sensitive assets such as small cap stocks have had a difficult 2014. Over the last three months they have underperformed large caps by roughly 9%.

What clues about asset allocation does the performance of liquidity sensitive assets give us?

We divide all stocks in the MSCI World Index into four basic baskets: 1) early cyclicals, comprised by the consumer discretionary sector, 2) hyper-cyclicals, comprised of the financial and technology sector, 3) late cyclicals, comprised of the energy, materials and industrial sectors and 4) counter-cyclicals, comprised of the health care, staples, utility and telecom sectors.  From there, we can compare the performance of various baskets to understand the larger performance trends.  One comparison that is particularly helpful is the relative performance of counter-cyclicals vs. cyclicals because it gives a feedback loop as to whether investors are gravitating toward assets that are leveraged to positive economic momentum or negative economic momentum.

In the chart below, we compare the relative performance of all counter-cyclicals in the MSCI World Index to all cyclicals in the MSCI World Index and overlay this on the relative performance of the S&P 500 to S&P 600 Small Cap Index.  The correlation is very high, at roughly 91% over the last couple years, and the recent notch down in the relative performance of small caps suggests counter-cyclicals have another leg of outperformance.

A Change In Consumer Behavior?

Retail sales in the US were unchanged in July, which prompted us to dive into our chart library to figure out what may be going on underneath the surface of the economy.  Job growth has been pretty solid this year, which when combined with increases in hours worked, has led to a an almost 4% year over year increase in personal income.  So what gives?

Answer: The savings rate has been rising all year.  In December 2013, the savings rate was 4.1% and by June 2014 it had risen to 5.3%.  An increase in the savings rate is a headwind to consumption and in turn GDP growth.  What's interesting is that all year, while the savings rate has been increasing, consumer confidence has been increasing too.  In the chart below, we plot the savings rate (inverted) against the US consumer confidence index.



The second derivative of the savings rate on a six months basis is +1.2%.  In the chart below, we plot the momentum of the savings rate against the year over year increase in retail sales.  The notch down in retail sales growth is understandable given the change in consumer behavior toward greater savings.



The increase in the savings rate is an important consideration when looking at interest rates.  In the chart below, we plot the savings rate against 10 year US Treasury bond yields.  While not a perfect overlay, the general relationship is apparent--a rising savings rate corresponds to falling interest rates.  Perhaps this change in consumer behavior is what the bond market is responding to... not a fluky 4% growth quarter, where a third of the increase was inventory accumulation anyway.  July retail sales data would suggest the inventory accumulation in the second quarter was the unwanted variety.



Over the last year, the savings rate has corresponded pretty well to the relative performance of the MSCI North America consumer discretionary sector.  In the back half of 2013, while the savings rate fell 1.2% percentage points, consumer discretionary stocks in North America outperformed.  In the first half of this year, as that trend reversed, so did relative performance. Perhaps the relative performance of consumer discretionary stocks over the last month has signaled a falling savings rate in the back half this year, or perhaps the drop in retailers today suggests the market is incorporating a more negative view of consumer behavior in the second half of the year.

Europe's ZEW Survey Foreshadows Disappointing GDP Results

Today's release of ZEW survey data for Germany and the Eurozone did not exactly meet expectations.  The consensus was for relatively minor declines (to 18.2 from 27.1 in Germany and to 41.3 from 48.0 in the Eurozone).  Instead, economic expectations fell to just 8.6 in Germany and to 23.7 in the Eurozone:

Should we brace for more disappointing results when preliminary Q2 GDP figures are released on Thursday?

Importance Of Earnings Momentum in Developed Asia

Every week we calculate the relationship between various factors and the performance of equities around the world.  We do this to understand what factors--like beta, valuations or fundamental factors--are most highly associated with the movement in equity prices.  Over the last year earnings momentum has moved to center stage in Asia.  In the table below we divide the MSCI Asia-Pacific Index into deciles of companies with the highest to lowest 1 month change in earnings estimates, calculate the performance of each decile and then calculate the coefficient of determination.

MSCI Asia-Pacific Factor Score - 1 Month Change in EPS Estimates


Over the last week earnings momentum alone has explained 87% of the variation in developed Asian equities, while it has explained 89%, 93% and 90% respectively of 1 week, 1 month and 1 year performance.  EPS momentum has been and continues to be the most important factor driving the performance of stocks in developed Asia.

The sub-industries with the highest earnings momentum in developed Asia are:



In turn, the sub-industries with the weakest earnings momentum in developed Asia are:

Spike in Distribution of European Stock Hits 2011 Levels

A while back, we noted investors' generally muted appetite for stock accumulation, as evidenced by our accumulation/distribution indicator:

On a regional basis, however, the picture looks more varied.  Investment in MSCI Asia-Pacific picked up nicely until the recent correction (though it remains positive), while trading in MSCI North America equities has had a slight bias towards selling for most of the year so far:

Meanwhile, positive accumulation trends that have prevailed in MSCI Europe since the beginning of 2013 broke down in mid-July and have since accelerated towards a level of net distribution not seen since 2011: