Recapping Tony Dwyer's CMT Presentation

Before getting into the meat and potatoes of his presentation, Tony shared an important perspective on people's behavior which affects their analysis. Paraphrasing, he said "When people remember the past, they don't remember exactly what happened. They remember their own interpretation or version of the past."

Being the data-dependent Strategist he is, Tony has done the work to go through the microfiche articles to see what was actually happening and being said during the periods in history that he's studying.

As market technicians we are historians, so we need to make sure we're basing our analysis on what actually happened and not on our own, or other's, faulty memory. 

After this brief intro, Tony got into some of the uncanny parallels between 1995 and today. He compared the current rate hike cycle to that which began in February of 1994 and the trade war with Japan, which had the same GDP as China does today, with the trade war we're experiencing today. He also pointed out other parallels in Macroeconomic and Fundamental data that were very compelling and set the backdrop for his overall outlook.

One of the first charts Tony shared was the performance of the Dow Jones Industrial Average following the first rate cut by the Federal Reserve. What the data suggests is that a rate cut typically occurs near a low in Equities and that forward 12-month returns are positive regardless of whether a recession occurs or not.

If no recession occurs, we tend to see a sharp rally following the rate cut and an average return a year later of roughly 24%. If there is a recession, a lot of the gains come within the last four months of that 12-month period but still end up roughly 11%. 

Recession or not, the initial rate cut is typically positive for Equities.   

Click on chart to enlarge view.

While the first chart provided context around the 1 year preceding and following an initial rate cut by the Fed, the second chart of the S&P 500 performance from 1990-1999 helps put it into the context of the period he's comparing the current environment to.

What we see here is that the two initial Fed rate cuts in July 1995 and September 1998 were both followed by economic reacceleration and extraordinary gains. Again, if this initial rate cut is anything like the others and the macro backdrop is similar to that of the mid-1990s, then it's hard not to be positive Equities from an intermediate/long-term perspective. 

Another interesting concept discussed by Tony is that the Real Federal Funds Rate is likely near its peak for this cycle. He points out that we've seen a lower peak in this rate during every cycle since 1980.

In essence, because there is more debt out there our ability (as a country, as corporations, as individuals) to withstand higher interest rates is reduced. Debt becomes too expensive to service and we have to stop borrowing, rates come back down, and then we borrow more.

Is this a new normal for rates and how does it end? Unfortunately we'll only be able to answer that in hindsight, but for now, this feedback loop is in place all over the world and we need to deal in the environment we're in.

Tony had a great way of putting it: "The amount of credit is changing how the engine works, but everyone is focused on the amount of credit."

In terms of a recession, Tony says there's only one indicator that has predicted every recession...and it's not the Federal Reserve.

It's the 2/10 year treasury yield curve, which has inverted ahead of every recession. This is in contrast to the Federal Reserve, which has successfully forecasted zero recessions.

Currently, this spread is sitting at roughly 20 basis points, low but not yet inverted, suggesting there's no recession in sight. But when we do see an inversion, that means the end of the world is imminent, right? Not exactly. History suggests that recessions tend to begin a median of 19 months AFTER the initial 2/10 year yield curve inversion.

Other data points that Tony shared included information about Small Business and Consumer confidence, both of which are still generally optimistic. On the household side, the Debt Service and Financial Obligations ratios are both stable at low, long-term levels.

Speaking of households, part of his bullish thesis is a demographic tailwind from Millenials who are reaching the age where they're being "adultified" (i.e. getting married, buying a house, having kids, etc.)

While there are some concerns out there like weak Global PMI data and earnings/valuation concerns, Tony concluded by saying that "...every sign that's ever existed before a recession has occurred is not here." 

Overall, Tony is bullish from an intermediate/long-term perspective and sees the current corrective period in stocks as an opportunity to put cash to work. He shared some of the more tactical indicators he relies on to figure out short-term market direction like the 10-week rate of change in the VIX and breadth thrusts like the one highlighted in the table/chart below.

Tony's presentation was a treasure trove of information, offering a longer-term perspective and putting into context many of the data points and narratives we're seeing in the news day in and day out.

It was a real treat for us at the New York Chapter of the CMT Association, so thank you again to Tony for taking the time to join us last week and for allowing me to share a bit of his presentation with you all.

If you want to view the PowerPoint Presentation, you can find it here and can connect with him via Twitter @dwyerstrategy.

Thanks for reading!