Global Semiconductor Sales Signal A Recession In 6 Months

Global Semiconductor Sales - Slight Decline Ends 3 Day Winning Streak

The stock market fell slightly, ending its 3 day winning streak. S&P 500 fell 9 basis points, Nasdaq fell 0.16%, and Russell 2000 fell 0.4%. This slight decline maintains the narrative that the S&P 500 can’t get above this ceiling which is a little bit above 2,800. 

Investors don’t pay much attention to these levels because if the fundamentals improve enough to justify a new record high, it will be achieved. Personally, I don’t see that occurring in the next few weeks. Even though the S&P 500 would only need to increase 4.35% to do so.

Global Semiconductor Sales - Boeing & Facebook Fall

Best 2 sectors on Thursday were technology and the financials which increased 0.2% and 0.41%. Worst 2 sectors were materials and industrials which fell 0.79% and 0.35%. Boeing stock fell 1.02%. It probably needs to stabilize for a few weeks before making a run higher.

Facebook stock fell 1.85% after its chief product officer, Chris Cox, and Chris Daniels, the leader of WhatsApp, announced they are leaving the company. Facebook might skirt regulations which meaningfully hurt the company. But the public’s increasing anger at the company probably is making some talent balk at the idea of working for the firm. 

That could have long term implications. The trade of buying Facebook because it was hated is now over. Its stock has rallied substantially. A tough part will be moving forward in a world highly focused on privacy. The public is waiting to criticize Facebook further if it missteps again. I don’t think Facebook and Instagram being down on Wednesday impacted the stock.

Global Semiconductor Sales - Utilities Are Very Overbought

While the utilities fell 0.14% on Thursday, they have been on fire this year. It’s surprising to see them do this well since the stock market has had an amazing first quarter. Usually, they are part of the risk off trade.

As you can see in the chart below, the utilities sector is nearly above the red section which signals they are very overbought. 

They are about as overbought as they were in mid-December right before they fell almost 10%. The utilities sector has been strong because inflation estimates are falling. That is pulling down treasury yields. 

The 2 year yield is only 6 basis points higher than the Fed funds rate. If the yield curve inverts, utilities could get even more capital because the risk off trade will be in play as investors start to expect a recession. Even with this slowdown occurring, I don’t see a recession in 2019.

Global Semiconductor Sales - Semiconductors In Danger

Global semiconductor earnings revisions are the worst out of any sector or sub-sector. 

As you can see from the chart below, quarter over quarter global semiconductor sales are down about 10%. That decline would be the largest one outside of a recession/right after a recession in over 20 years if we aren’t in a recession now. While this seems like a full proof way of predicting a recession in the next 6 months, I don’t believe it. 

One industry doesn’t control the economy. I’d need to see jobless claims spike, the yield curve invert, the ISM non-manufacturing index contract, and the ECRI leading index hit new yearly growth cycle lows before I am on board with the concept of a recession happening this year.  

Global Semiconductor Sales - Passive Investing Is Gaining Steam

Passive investing is the smartest choice for most investors because mutual funds often underperform. I’d caution against putting all your money into the S&P 500 even though those firms have international exposure as that is a bet on America. 

The idea of passive investing is to be highly diversified, so you aren’t making big bets. A main bet passive investors have is the global economy won’t have an Earth-shattering change which halts global markets. Individual economies and global economies recover from recessions. 

The type of negative situation I’m referring to is similar to the change Venezuela has experienced except on a global scale. Some say that if that occurred, everyone would be doing poorly, so there’s nothing you can do to avoid it.

As you can see from the chart above, currently active investors make up 63.3% of the market and passive investors are 36.7%. 

By 2021, which is in only 2 years, passive investments will overtake active investments. Investing in stocks has become like a public utility where people put their money in and expect to get about 7% returns every year.

As you can see on the left hand side of the chart, during the financial crisis less than 20% of investment in stocks was in passive funds. This is important because the next big crash will be the first one where passive dominates the investing landscape. 

I’m interested to see how many investors give up on the passive strategy and panic as stocks are crashing. Investors held up pretty well in Q4 2018, but that was a quick shock which ended as quickly as it came.

Global Semiconductor Sales - Amazing 10 Year Annualized Returns

Investing only in the S&P 500 isn’t a passive strategy. It seems great to many investors who aren’t professionals who follow global markets and are aware of historical trends. 

As you can see from the chart below, the past 10 years of returns were 16.7% per year. Those who are putting their money away hoping to get just 7% per year should be pleasantly surprised. Based on historical records, these returns won’t be beaten, but they can be sustained for a few years. 

Since the 2009 bottom was just lapped, it’s very safe to say the next 10 years won’t be as good as the 10 year period from March 2009 to March 2019.  

Global Semiconductor Sales - Conclusion

The stock market ended its 3 day winning streak, but the losses from last week will likely be rescinded this week. 

Durable goods report was solid, but didn’t show enough strength to push GDP estimates above 2%. It would be odd to see the market at a record high with earnings falling in Q1 and GDP growth at 1.4%. 

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