“This is small caps’ 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1% (the current decline sits at about 10%). Of the first thirty-five corrections, every one of them was accompanied by large-caps also falling, until now (an average decline of 12.8%). The thing that has people scratching their heads is why large-caps have been blessed with impunity while small-caps have begun to roll over.” Meanwhile, the recent stock market jitters have Reuters saying “Buy in May”: “looking back at the four ‘sell in May’ corrections since 2010, all have been triggered by sudden scares about a U.S. growth slowdown. Once these growth panics subsided, the corrections sharply reversed. The big difference this year is that a U.S. growth scare has already happened, and all leading indicators suggest accelerating activity in the next few months…The once-in-a-generation divergence suggests that this could be an ideal time to rebalance portfolios by buying equities and selling bonds — the opposite strategy that has worked every May since 2010.” Meanwhile, tech and momentum stocks are cheaper, but not cheap: “Money managers say it is no mystery what has been at work. These stocks rose to stratospheric prices compared with their earnings outlooks, driven by so-called momentum traders such as hedge funds that pile into rising shares. But these firms were equally quick to hit the sell button…’The challenge these stocks are going to face is who is the buyer here that steps in now that the bloom is off the rose.’” Meanwhile, divergence shouldn’t necessarily surprise us: some things just aren’t meant to correlate.
China’s New Normal
“China’s new bank lending and total social financing weakened in April, but money supply growth picked up slightly, indicating the central bank is treading cautiously in steering policy to support the slowing economy…Central bank governor Zhou Xiaochuan was reported as saying on Saturday that China will not use any large-scale stimulus to boost its economy, in response to speculation that authorities might lower reserve requirements for banks to spur growth.” Meanwhile, “President Xi Jinping said the nation needs to adapt to a ‘new normal’ in the pace of economic growth and remain ‘cool-minded’ amid a slowdown that analysts forecast will lead to the weakest expansion since 1990.” Also, “almost half of the economists surveyed by Bloomberg News last month predicted a cut in the reserve requirement ratio this year as part of an easing of monetary policy to support the economy. Expectations for a reduction have increased after a government report last week showed consumer inflation moderated to an 18-month low in April and factory-gate prices fell for a 26th month.” Meanwhile, here’s a word you don’t often hear used to describe China: deleveraging. “even as the state sector continues to leverage up…non-state entities saw the ratio falling…If we treat the debt of SOEs and local government guaranteed corporates just as government debt, China’s situation is, to some degree, similar to the post-Lehman US: rising public debt, declining private sector leverage. Particularly, the state sector as a whole generates sub-par economic return. Loss-making industrial SOEs account for more than a quarter of total industrial SOEs, double the ratio among non-state industrial enterprises. Granting credit to profitless corporates is not too much different from having quantitative-easing liquidity trapped in the commercial banks’ vault.” Also, this patriot isn’t buying the fifth season of America’s Decline: Chinese Edition.
“U.S. pension funds face a dilemma that might be considered a nice problem to have: record amounts of capital flowing back from private-equity investments…all that cash coming back from private-equity investments is upsetting the careful balance of investments that pension funds must maintain to achieve steady returns over decades to pay thousands of retirees.”
Americans are moving around less than they used to: “In the year ended March 2013, just 20.2 percent of those aged 25 to 34 relocated, the lowest rate for that age group in data going back to 1947, down from 31 percent in 1965, Frey said. While the decline in mobility is more pronounced among the young, older Americans, too, have become less inclined to pull up stakes. Among all Americans, 11.7 percent moved in 2012-13, just above the 11.6 percent all-time low reached two years earlier…a combination of relatively low-paying opportunities, the burden of student loans and an aversion to taking risks explains the reluctance to relocate.”