Resilient Consumer? Not During The Manufacturing Retreat And Corporate Revenue Recession

Concerned investors started punishing foreign stocks and emerging market equities in May. The primary reason? Many feared the adverse effects of declining economic growth around the globe as well as the related declines in world trade. By June, risk-averse investors began selling U.S. high yield bonds as well as U.S. small cap assets. A significant shift away from lower quality debt issuers troubled yield seekers, particularly in the energy arena. Meanwhile, the overvaluation of smaller companies in the iShares Russell 2000 ETF (IWM) prompted tactical asset allocators to lower their risk exposure.

All four of the canaries (i.e., commodities, high yield bonds, small cap U.S. stocks, foreign equities) in the investment mines had stopped singing by the time the financial markets reached July and early August. I discussed the risk-off phenomenon in August 13th’s “The Four Canaries Have Stopped Serenading.” What had largely gone unnoticed by market watchers, however? The declines were accelerating. And in some cases, such as commodities in the DB Commodities Tracking Index (DBC), investors were witnessing an across-the-board collapse.

The cut vocal chords for the canaries notwithstanding, there have been scores of warning signs for the present downtrend in popular U.S benchmarks like the S&P 500 and Dow Jones Industrials. Key credit spreads were widening, such as those between intermediate-term treasury bonds and riskier corporate bonds in funds like iShares Baa-Ba Rated Corporate Bond ETF (BATS:QLTB) or SPDR High Yield Bond (JNK). Stock market internals were weakening considerably. In fact, the percentage of S&P 500 stocks in a technical uptrend had fallen below 50% and the NYSE Advance-Decline Line (A/D) had dropped below a 200-day moving average for the first time since the euro-zone’s July 2011 crisis. (See Remember July 2011? The Stock Market’s Advance-Decline Line (A/D) Remembers.)