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 InFocus

U.S. Government Debt, Economic & Market Trends – Global Stocks
November 14, 2018

October 2018 was full of economic trend reversals and rising stock market volatility accompanied by lower inflation and lower prices for commodity and stock indexes. Lower inflation usually leads to lower bond yields. However, this year’s annual U.S. deficit is on track to be near $1.5 trillion as total U.S. Government Treasury (TSY) security issuance hit $1 trillion (Figure 1). Greater TSY supply will most likely keep TSY yields higher than they would be relative to recent inflation/economic trends. Yesterday, Saudi Arabia announced that it would cut oil production, which has reversed the recent -20% plunge in oil prices. The combination of higher TSY yields and higher energy prices will sustain higher market volatility, resulting in higher economic uncertainty.

Stocks are responding to the higher economic uncertainty. Technically, the Dow Industrials hit a new high, while broader indexes did not. The S&P 500 and a few other broad indexes recently closed below their 200-day moving average price at a time when their respective 200-day moving averages are in downtrends. This observation and non-confirmations by Dow Theory and many market breadth indicators make it more likely that global stocks have or soon will enter a bear market. On top of all these factors, the economic expansion (second longest since 1900) and stock market (fourth longest since 1906) are long in the tooth.

  1. Rising stock market volatility.
  2. An emerging market crisis.
  3. A slowing U.S. housing market.
  4. Weak oil prices, which
  5. brings inflation down.
  6. A stronger U.S. dollar, which
  7. weakens commodity prices.
  8. High government deficits and greater supply in U.S. TSY, which
  9. sustains interest rates higher than norm.
  10. A debt-to-gross domestic product (GDP) ratio near 104%, which significantly lowers economic growth.1

Figure 1. Gov’t Deficit & Treasury Debt Issuance Rise Sharply – Dec 31, 1999 - Oct 31, 2018

Source: U.S. Department of the Treasury and the St. Louis Federal Reserve

Figure 2. Treasury Debt to GDP & Total Gov’t Debt to GDP – Dec 31, 1995 - Oct 31, 2018

Chart courtesy of http://www.StockCharts.com.

InFocus Highlights- Figure 3 begins March 1, 2007 and ends November 12, 2018.

  • Since May 2007, the Dorsey Wright Country and Stock Momentum Index (DWCSM), the S&P 500 Total Return Index (SPXTR) and the MSCI World (ex. USA) Index have recorded cumulative returns of 196%, 148% and -14% while YTD their respective returns are -8.2%, 3.7% and -11.3%. (Figure 3).
  • Despite a recession and bear market in 2007-2009, DWCSM bests SPXTR and MSCI World (ex. USA). DWCSM’s risk/reward profile makes it an appropriate diversifier in a global portfolio.
  • Goldman Sachs and a few other Wall Street firms expect a recession no later than 2020. Bear markets typically begin two to 12 months before most recessions. Over the past 118 years, the U.S. has experienced 23 recessions. The Dow Industrials declined during every recession, with the only three exceptions being the recessions of 1918-19, 1926-27, and 1945.

Figure 3. DWCSM, SPXTR & MSCI World (ex. U.S.)

Chart courtesy of http://www.StockCharts.com. DWCSM performance prior to December 5, 2017 is based upon back testing its methodology.

1Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst (2013), found that over the last eight centuries “the average real G.D.P. growth rate for countries carrying a public debt-to-G.D.P. ratio of over 90 percent is 2.2 percent.

DISCLOSURE: This report does not provide tailored investment advice. It was prepared without regard for specific circumstances and objectives. The securities shown may not be suitable for all investors. Arrow Insights recommends that investors independently evaluate particular investments and strategies. The appropriateness of an investment or strategy will depend on investor circumstances and objectives.

The contents are not an offer to buy or sell any security or to participate in any trading strategy. Arrow Insights and its affiliates or its employees not involved may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report.

Arrow Insights and its affiliate companies conduct business related to securities covered in its research reports, which may include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, and investment services. Arrow Insights makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.

Reports prepared by Arrow Insights research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals affiliated with Arrow Insights.

HYPOTHETICAL RESULTS ARE BASED ON CRITERIA APPLIED RETROACTIVELY WITH THE BENEFIT OF HINDSIGHT AND KNOWLEDGE OF FACTORS THAT MAY HAVE POSITIVELY AFFECTED ITS PERFORMANCE AND CANNOT ACCOUNT FOR ALL FINANCIAL RISK THAT MAY AFFECT THE ACTUAL PERFORMANCE OF THE FUNDS. NO HYPOTHETICAL PERFORMANCE RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK, INVESTOR BEHAVIOR, OR OTHER MARKET FACTORS – ANY OR ALL OF WHICH CAN IMPACT ACTUAL PERFORMANCE RESULTS. THERE ARE OFTEN VAST DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND ACTUAL PERFORMANCE. NO REPRESENTAION IS BEING MADE THAT ANY COMBINATION OF INVESTMENTS WILL ACHIEVE SIMILAR PERFORMANCE RESULTS TO THOSE ILLUSTRATED.

DWACSM: The Dorsey Wright Country and Stock Momentum Index (“DWACSM”) is a Dorsey Wright & Associates (“Index Provider”) index. DWACSM consists of long positions in the equity markets of foreign countries exhibiting relatively strong momentum characteristics among the foreign universe. The foreign universe will be composed of countries from the developed and emerging markets, excluding the United States. This material is for informational purposes only and is not intended as an offer to buy or sell any security. The index live date is December 5, 2017, with an inception base-date of January 1, 2002. Index data prior to the live date is hypothetical. Nasdaq®, DWA and Nasdaq DWA Country and Stock Momentum Index are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Arrow Investment Advisors, LLC. The Product(s) have not been passed on by the Corporations as to their legality or suitability. The Product(s) are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).

Past performance is not a guide to future performance. Any estimates of future performance are based on assumptions that may not be realized.



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