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Don't Be Fooled By The Level Of The Stock Market

Submitted by Bryce Coward via Gavekal Capital blog,

We’ve had some run in stocks over the last several weeks. With today’s rally US stocks are now nearly 13% above their late-August low and are in spitting distance of another all-time high.

This would be great news if only other asset classes and the internal leadership of the stock market confirmed the seemingly outright bullish behavior in the headline level of the stock indexes. Instead, what we have seen since that important August low in stocks is:

  • Global bond yields at a similar level of lower than in August

  • The most cyclically inclined commodity prices (copper and lumber) basically at the same level as in August

  • Late cycle stocks (Materials, Energy and Industrials, the ones that should be outperforming handsomely six years into the cycle) still obviously struggling

  • Growth counter cyclical stocks (Staples and Health Care) just a hare off of their cycle high

This combination has us wondering about what we view as possibly the single most important deflationary/inflationary variable in financial markets at this moment. Namely, that China is “fixed” and on a more sustainable growth trajectory and not just in the middle of a cyclical pause before growth starts to crater lower again, as it must.