While I was growing more negative this year, other investors have grown more positive, seeing equities as the sole alternative in a zero interest rate world. According to Merrill Lynch's May global fund manager survey (230 investors with $660 billion in assets under management) released last week, hedge funds are at their highest net long exposure in seven years. Clearly, this dominant and influential investor class (as well as other classes who are joining in) has dismissed my concerns of slowing nominal GDP growth and the challenge to corporate profits.
The Good and the Bad
There have recently been some bright spots. Oil prices have slipped, jobless claims have trended lower, and the outlook for employment has improved. The labor force is expanding somewhat, and temporary jobs growth has turned up but possibly for the wrong/bad reasons (related to Obamacare). Nevertheless, I have maintained my bearish market view owing to multiple forces at work that had suggested to me that first quarter 2013 would likely mark a peak in U.S. real GDP for the year. This expected moderation of economic growth, I had thought, would produce weak nominal GDP that would limit corporate pricing power, jeopardizing already-inflated profit margins and pressuring corporate profits to well under consensus expectations. I remain concerned, but thus far investors are totally indifferent. Housing: Hedge funds and other corporate and institutional investors have gobbled up homes for investment, creating the appearance of a more vibrant residential market than might actually exist. This has served to prop up home prices, which, in turn, could serve to turn away first-time homebuyers (who continue to be haunted by little wage improvement and a still relatively sluggish labor market). I have argued that construction only represents about 3% of U.S. GDP, and, as such, I didn't think (and still don't think that) the housing market could provide enough leverage to get U.S. real GDP growth to exceed a tepid 2% rate. I continue to expect a pause in an anticipated durable multiyear recovery in housing. Jobs: While unemployment claims have begun to improve, this volatile series likely benefited from continued Superstorm Sandy reconstruction. Moreover, the improvement appears to be mostly in temporary and lower-paying jobs. As I discuss later, a strengthening U.S. dollar reduces the competitiveness of U.S. corporations and will likely govern growth in the labor force.