Is A Growth Scare Just Around The Corner?

 | May 27, 2014 12:09AM ET

As Joe Wiesenthal recently noted, 

These warnings from cyclical stocks and the bond market suggest to me that the US is unlikely to be able to de-couple from the rest of the world. A global growth slowdown will eventually affect the US economy and the markets are starting to price in that possibility.
h3 Watch estimate revisions!/h3

I have also thought of technical analysis as a branch of behavioral finance. In effect, the technical condition of the market tells me the state of market expectations. Right now, we have:

  • Early cycle interest sensitive sectors rolling over after leading the market higher from the 2011 trough;
  • Mid cycle sectors like Consumer Discretionary have weakened; 
  • Business-related mid cycle sectors like Cyclical and Industrial stocks are now starting to lose their leadership status;
  • Late cycle sectors such as Materials and Energy are turning up on a relative basis; and
  • Defensive bear market sectors such as Utilities and Consumer Staples have become the market leadership.
 
Current conditions have market fundamentals and technicals disagreeing. Market fundamentals point to a continued expansion, while market technical conditions are highly suggestive of a growth slowdown. I don`t know if a slowdown will unfold, but as an example Across the Curve  featured a Barron's interview with Stephanie Pomboy who postulated a US slowdown based on the removal of QE:
Barron’s interviewed Stephanie Pomboy of Macro Mavens this week and she presented an especially bearish view on the US economy. She argues that as the Federal Reserve stops buying Treasuries the economy will falter and the Fed might even taper the taper. She thinks there is little upside to Treasury yields and believes that the 10 year will be trapped between 2 percent and 3 percent for a long time.
 
Is a growth scare just around the corner? If so, we will see the first signs of fundamental deterioration if consensus forward earnings start to get revised downward. We have already had a warning from the relative performance of cyclical stocks. The next thing to do is to watch the estimate revision rate.

Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd . (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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Written By: Cam Hui

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