The table below shows the year to date performance of a few different assets. As you can see, the tech sector has done well which is consistent with their mostly great earnings reports. The sector outperforming the market during the correction is a good sign because tech needs to be the market leader. Often tech does worse during corrections because it has a high beta. When tech and consumer discretionary lead, it’s a good sign because they represent the ‘risk on’ trade. When telecom and utilities lead it’s a bad sign because those are the ‘risk off’ trade.
U.S. real estate has had a terrible year because of rising interest rates. I’m curious how housing will react to mortgage rates hitting 5%. The home ownership rate has barley improved in the past couple years and housing is expensive for many median income earners. The increase in interest rates could catalyze a decline in home values. I’m not expecting a crash like 2008, but if they fall half that amount in the midst of a recession, it could seriously hurt the consumer. Unsurprisingly, emerging markets are having a great year as their economies gain steam. Inflation linked treasuries have done much better than other bonds. If you’re looking for safety, it’s a no brainer to buy TIPS instead of regular bonds because inflation is picking up this year. Gold has done well which is expected since there was volatility in stocks and inflation picked up. That should be the perfect mix for gold.
Buybacks Stumbling
I expect buybacks to increase in 2018 because earnings are improving and firms are repatriating overseas capital. Some bearish investors thought the peak in buybacks, which occurred in 2016, was going to lead to a recession and a stock market crash. The reality is buybacks are affected by earnings changes; they don’t cause stocks to go up and down. The lack of buybacks doesn’t cause a crash.
The chart below is suspect because there’s only relevant data from the last cycle and this one. Buybacks weren’t in vogue before the 2000’s. There have been a few historical charts such as jobless claims which have suggested a recession will occur soon based on the previous two cycles. Clearly, you need more data than just the past 25 years. If more relevant data was available for buybacks, you could have easily seen that there wasn’t going to be a crash in 2016. Earnings growth can stall or can even decline for a year or two without a recession.
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