Time to be defensive

Bob Doll at Nuveen says he does not expect a recession (for the next few quarters) but remains neutral towards stocks:

“Although stock prices have advanced over the last couple of weeks, investors remain focused on downside economic and policy risks and are increasingly concerned about a possible recession. The latest manufacturing readings hurt economic sentiment, while trade issues, turmoil in Hong Kong, the increasing likelihood of a messy, no-deal Brexit and a downturn in European growth are increasing worries.”

The Institute for Supply Management August Report points to an economic slow-down, with the Purchasing Managers’ Index (PMI) falling to 49.1 percent, from 51.2 percent in July. The New Orders Index also declined, to 47.2 percent from 50.8 percent in July. Readings below 50 indicate contraction.

“…The 2020 U.S. elections linger in the backdrop, offering potential to produce either a dramatic shift in economic policy should the Democrats retake the White House, or continued policy uncertainty should President Trump win reelection.

Against this backdrop, investors are struggling to position their portfolios. Consensus appears to say that it is time to turn more defensive, but U.S. Treasuries and other government bond yields appear to offer little if any value. Indeed, government bond markets are pricing in a high likelihood of a recession and a prolonged period of sluggish growth. At the same time, equity markets have been range bound over the last several months (and, by some measures, since the start of 2018) and are providing unclear signals.

In our view, the preponderance of the evidence suggests that growth will remain sluggish but a recession will be avoided, at least for the next few quarters. In other words, we think the signals coming from the equity markets are more accurate than those coming from government bond markets. Nevertheless, we continue to have a broadly neutral view toward stocks, and think investors should remain selective, focusing on such themes as companies that offer compelling value and those that have the ability to put relatively high levels of free cash flow to work.”

The wild card is the impact that high levels of uncertainty may have on business investment and employment.

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This is a time to be defensive.

Bonds, traditional dividend-paying blue chips, and growth stocks all appear over-priced at current levels. Small caps are high risk in the current volatile environment and we are focused on large cap stocks with strong cash flows and defensible market position in non-cyclical industries. Some cyclical sectors may present value but investors need to be selective because of vulnerability to a potential down-turn.

Chinese Manufacturing Activity Falls in July – The New York Times

From Reuters:

BEIJING — China’s factory sector contracted by the most in 15 months in July as shrinking orders depressed output, a preliminary private survey showed on Friday, a worse-than-expected result that should reinforce bets the struggling Chinese economy will get more stimulus.

The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.2, the lowest reading since April last year and a fifth straight month below 50, the level which separates contraction from expansion.

Read more at Chinese Manufacturing Activity Falls in July – The New York Times.

Reid: Eurozone's 2013 Nightmare Scenario | Business Insider

In his 2013 outlook, titled In Authorities We (have to) Trust, Deutsche Bank credit strategist Jim Reid warns that Europe is headed for tough times in 2013.

Matthew Boesler at BusinessInsider writes:

Reid highlights three major issues.

To start, European stocks – and stocks in markets around the world, for that matter – are considerably overvalued based on historical correlations to PMI data….

The second problem is austerity. Most accept that austerity measures weigh on economic growth in the short term, yet euro-area governments are moving forward with plans attempting to bring fiscal budgets back into balance anyway.

…. the third problem: namely, that governments have consistently set economic forecasts too high and then failed to meet their own targets.

Read more here Reid: Eurozone’s 2013 Nightmare Scenario | Business Insider.

Twin China PMI surveys show economy perking up | Reuters

By Lucy Hornby

“The return of the PMI above 50 suggests economic momentum has indeed picked up. It indicates the effect of policy easing may have been stronger than the consensus expected,” Zhiwei Zhang of Nomura said in a comment emailed to Reuters. “We believe macro data will continue to surprise on the upside in coming months, as the government continues to ease policy through the period of leadership transition.”…….

via Twin China PMI surveys show economy perking up | Reuters.

China Factory Activity Slows – WSJ.com

Data in recent weeks has painted an increasingly gloomy picture of slowing manufacturing, weak exports and tepid bank lending in China. The latest indicator to spook markets came Thursday with the flash HSBC Purchasing Managers’ Index, an initial reading on manufacturing activity in March. The PMI fell to a preliminary reading of 48.1, down from 49.6 in February.

The March PMI reading marks the fifth straight month the index has indicated contraction, signaling extended difficulties for the nation’s manufacturers. A reading below 50 indicates contraction from the previous month, while anything above that indicates growth.

via China Factory Activity Slows – WSJ.com.

China’s manufacturing sector under contractionary pressure – Westpac: Phat Dragon

Well, the official November manufacturing PMI, a more reliable survey than the private sector alternative [once seasonally adjusted], saw finished goods inventories rise to their highest reading ever in November. Along with across the board weakness in order books….. and a deceleration in output, import weakness, a steep decline in the new orders-to-inventories ratio and a depleting work backlog, the manufacturing sector looks to be under contractionary pressure. The moment of discontinuity has not yet arrived, but the odds of such an unwelcome appearance manifesting in the near term from this enfeebled jumping off point have certainly shortened.

Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC

The euro zone’s manufacturing PMI fell to 47.3 in October, its lowest level since July 2009, with German manufacturing falling for the first time in two years because of a combination of drops in output and new orders and backlogs of work.

The fall in euro zone PMI “reflected steep declines in both the manufacturing and services indices, suggesting that the deterioration in growth prospects reflects developments both at home and abroad,” Ben May, European economist at Capital Economist, wrote in a market note.

via Euro Zone – ‘Miserable’ Euro PMI Heightens Recession Risk: Economists – CNBC.

Regulators Seize Main PMI Subsidiary – WSJ.com

The main subsidiary of mortgage insurer PMI Group Inc. has been seized by insurance regulators in Arizona, and will begin paying just 50% of claims beginning Monday, according to its website…… Mortgage insurers have suffered from billions of dollars in losses on policies they sold in the years just before the housing bubble burst. PMI alone has reported about $3 billion in losses since the fourth quarter of 2007.

via Regulators Seize Main PMI Subsidiary – WSJ.com.