Macro Trends/Forecasts

Jeff Miller

"The Man Who Called Dow 20,000" --CNBC

Current Strategy and Tactics

My approach for long-term investors does not involve market timing.  I analyze overall conditions, sectors, and stocks and take what the market is giving me.  I adjust allocations based on the client and overall market conditions.

I use technical analysis in two ways:

  1. When I am trying to find a good entry or exit point, and
  2. When I am looking for a very safe stock that is suitable for writing options – my income program.

I am cognizant of risks, both long and short term.

The current situation is a very tricky one for methods of all stripes.  I have tried to raise points in past posts – causal relationships, questioning your own thinking, balanced analysis of fundamental data, and a few stock and sector ideas thrown in.  This is a good time to pull some of these ideas together.


Here are some conclusions I have reached with a high degree of confidence.  I have provided reasons elsewhere and I’m willing to discuss, but this is not the place for an extended analysis.

  1. The economy is chugging along at a baseline growth of about 2%.  The Q1 GDP figure was an illusion produced by trade effects and inventories.  I (and many others) pointed this out at the time, but it is a political issue as well.  The Q2 decline was no surprise.
  2. There is no recession on the immediate horizon – approximately one year.  No one can forecast reliably beyond that time frame.  I made an extended study of the topic in 2010, when it was not pressing.  Since then, I have followed the methods of many sources.  I don’t do my own recession forecasting, but my experience and training enables me to identify who is best.
  3. The trade war is already costing the US about 30 bps in GDP.  This can easily move higher.  The aggressive immigration policy probably costs at least as much.
  4. The weakness in the ten-year note (and also the yield curve inversion) are an intermediate (not primary) indicator.  Our yields do not stray far from those in Europe.  Those in Europe are driven by global growth pressures.  Global growth is under pressure from the trade war. 

What to Watch

The market perception (and also that pushed by the Trump Administration) has most of the causal factors wrong.  Everyone’s attention is on the Fed, and so many claim to be experts.  As an investor, it is better to understand the Fed and its likely moves rather than focus on criticism.  Whether or not you are right in believing that they are all morons and you have the answers, it does not matter!  The concept of ‘Don’t Fight the Fed” has a sound rationale.

If the typical allegations are wrong, what should we watch?

  1. Changes in Trump policy.  The tax cut trial balloons are a small indication.  He is getting warnings – not from his lame economic team, but from the party mainstream and contributors – that there is real recession risk and it might hit during election season.  At some point, the Koch brothers’ business losses will get some attention.
  2. There are limits on the effectiveness of Fed policy.  Lowering interest rates is not a magical method for stimulating demand.
  3. The Fed wants to maintain independence from the President.  There are many good reasons, but the main one is that a politicized Fed would always have low interest rates and plenty of inflation.
  4. The current cycle is that Trump trade policy creates global economic weakness and uncertainty.  The Fed acknowledge that this was a factor in the last rate cut.  Trump immediately increased the uncertainty.
  5. The market, especially active traders, are consistently more bearish on the US economy than is the Fed.  The assertion that the Fed follows the market is incorrect.  Both are looking at the same evidence.  Their conclusions are similar, but not identical.  The last meeting was yet another example.

Current Worries

This brings me to the tactical concern.  As I stated in last weekend’s WTWA, I am worried that market participants expect too much from Powell’s Jackson Hole speech.  This is not the normal venue for announcing policy changes.  He will probably want to maintain the FOMC options. I would be surprised to see an endorsement of a new easing cycle.

I cannot be sure, of course, what is already “baked in” but it seems like a good time to be a bit cautious.  I have some cash available and a shopping list at hand.

Stock and Sector Ideas

I do not engage in much cheering about positions, but I hope some joined me in buying chip stocks near the bottom when so many expected a recession and trade war effects.  I have sold half of my position, but I still like the sector.

In case you haven’t noticed, my current favorite – home builders – have been showing strength despite the rest of the market.  The combination of demographics, lower costs, lower mortgage rates, and less inventory is having an effect.  The housing story is complicated, so someone on a mission can always find some “evidence.”  I recommend taking a look at the stocks, which are still very cheap.

Jeff Miller provides Economic Analysis as well as Market Forecasts as one of the original contributing analysts at FATRADER. A quantitative modeling expert and former university professor who is the #1 Economics contributor at Seeking Alpha, Jeff is regarded as an expert on economics, market reaction to news events, and computer-based trading.
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