@theMarket: Markets Climb Higher
In the absence of any earth-shaking news, stocks tend to follow the recent trend. That trend, since the election has been up, so ... The question to ask: when we can logically expect that trend to change?
As readers may recall, my target for the S&P 500 Index is somewhere between 2,443 and 2,475, which I expect we will hit before the end of the second quarter. This week, we broke 2,400, regaining everything that was lost in last Wednesday's 2 percent downdraft. Now, that 2,400 price level should act as a support for the bulls.
"Are you still bullish?" asked one of my clients yesterday.
"That depends upon your time frame," I answered.
In the short-term I am, if you consider that between now and say, the end of June, the markets could tack on another 2.5 percent or so. That's not a bad return for 30-some days, and it is far better than the yield on the 10-year, U.S. Treasury Note (2. 24 percent).
However, I recognize that the odds against further gains in the medium-term (this summer) are climbing. For example, the S&P 500 has not had a 3 percent drop since the August-November, 2016 time period, nor has it had a 5 percent decline since June, 2016. Given that we have had 16 corrections of 5 percent or more since the 2009 bottom, we are overdue for some kind of larger pullback.
But in the meantime, the technology sector has been the stand-out winner so far this year. The FANG stocks (Facebook, Apple, Netflix and Google) have clearly been responsible for that leadership, representing about half the gains. Since a fair amount of their goods are bound for overseas markets, a decline in the dollar also helps sales, because it makes their products cheaper for foreign consumers. And the dollar has dropped from a high of around $103, the U.S. dollar index (DXY) is now trading slightly above $97, a substantial decline in currency terms.
Why is this important?
Well, "leadership" among stocks is a fairly important tool. When there is an expanding group of leaders in the market or a sector, it means that more and more investors are willing to pay up, believing prices are going ever higher. In this case, leadership among the leading sector of the stock market is narrowing. So much so that four stocks represent an outsized percentage of the gains.
The dollar's decline is also something that confounds a number of traders. Usually, when interest rates rise, a nation's currency rises with it. The financial markets expect interest rates to rise in the U.S. The Federal Reserve Bank, as we know, is expected to raise rates again in June.
They will also be reducing their $4.5 trillion balance sheet, which is stuffed to the gills with Treasury bonds and mortgage-backed securities.
"Shrinking the balance sheet" is just financial speak for selling bonds, rather than buying them, which they have been doing since 2008 in an effort to support and grow the economy.
When you sell bonds into the market, the tendency is for interest rates to rise. Given this two-prong rate-raising strategy, the dollar should be rising but the reverse is happening. How this will play out is something to watch.
These are simply two variables of many I follow and consider in forecasting the direction of the markets. The rise of interest rates, the path of the dollar and leadership within the stock market has me concerned but not overly so, at least not yet. Right now, my tea leaves signal steady as she goes. Of course, on a short-term basis, expect more ups and downs now that President Trump will be returning from his first foreign field trip. And remember, with him comes "The Return of the Tweet."
The intensification of the media-led, Russian witch-hunt and the expected battles over health care, the budget, and everything else that the administration has proposed will keep things unsettled and investors on their toes. As the worries mount, markets should climb towards my target range, and when they arrive, we will see what happens next so stay tuned.
@theMarket: The Trump Dump
Investors were shocked this week when the U.S. stock markets fell almost 2 percent in one day.
Wall Street blamed it on the growing scandals engulfing the White House. However, there was little follow through despite predictions that this was the beginning of the long-awaited pullback.
To be honest, much of the controversy coming out of Washington — demand for Trump's impeachment, obstruction of justice, witness-tampering, etc. — is simply partisan politics deliberately fueled by a biased media. All of the above, which had been building for days, finally reached the tipping point for investors. As weak-kneed day traders started to sell, the program computers began to join in and the rest was history. Wednesday turned out to be the worst day of the year for stocks.
I actually think the carnage was a good thing. It furnished all of us a reminder that markets do go down as well as up. Ever since the November election, stocks have climbed.
There has been little in the way of volatility and at most a mild 3 percent pullback in some of the averages over a few weeks. That is not normally how the stock market works.
However, we are human and the longer something continues, the more we expect it to continue into the future. When it changes, not only are we surprised but our first reaction is to cut and run. I am sure some of you did just that this week.
Over the last two days, stocks have regained about half the losses sustained on Wednesday. From a technical point of view we have at least a 50-50 chance that traders will push the averages back down to the lows that occurred on Wednesday. It's called a retest. If we hold there (around 2,350 on the S&P 500 Index) traders will simply chalk up the event as a warning that somewhere ahead of us looms a larger sell-off.
You might ask why the pundits' predictions of a further sell-off didn't come true. The answer lies in how we are all being manipulated by politics and the media. The "experts" told us that all this Russian-inspired controversy, followed by the firing of the FBI director, and the creation of a special jury to investigate wrong-doing within the Trump White House would further delay what the market needs and wants. Tax reform, health care, infrastructure spending and much more would now be pushed back even further and further. It may not even happen at all if Trump were to be impeached.
And just as investors began to believe all this tripe, the White House has sent in its forces to reassure investors that all is on track on the economic reform front. Suddenly, the Trump budget will be announced next Wednesday offering all kinds of goodies to investors. At the same time, Steve Mnuchin starts talking about 3 percent GDP growth again. And "The Donald" takes off for a five-nation trip, his first, today, which was sure to distract the media from its Russian witch hunt.
The moral of this tale for you and I is to continue to ignore the noise. Think of yourself as a batter who must keep his/her eye on the ball. That ball is the growth rate of the economy, (good), earnings (great), the Fed (moderate). Ignore everything else. Hang in there.
@theMarket: Earnings Better Than Expected
First-quarter earnings are coming in higher than expected while stock indexes hover just below historical highs. All that is necessary for further gains is a catalyst and that may be just around the corner.
This Sunday, French presidential elections will occur. As I wrote last week, it appears that the centrist candidate, Emmanuel Macron, has a widening lead over Marine Le Pen, the more radical right-leaning candidate. Why is that important to you?
It is all about the continued stability of the European Community and their currency, the Euro. Investors are concerned that if Le Pen should win, she might try to pull France out of the EU (think of the U.K. and Brexit). If Macron wins, the thinking is that he will assure a "business as usual" attitude among the French, which would be good for the European markets and therefore our own.
On the U.S. front, the House passage of a somewhat, garbled Repeal and Replace health care bill is also good news for the markets. The second attempt passed 217 to 213 on Thursday afternoon. It is not what is in the legislation as it currently stands. By the time the Senate gets through with their version; most of the crazy stuff will have been changed, amended or just thrown out.
House Republicans are risking their political future in ramming through this new legislation, which will potentially hurt a large block of the constituency that only recently voted them into office. In its current form, by the time mid-term elections occur in 2018, enough voters will have felt the full brunt of these changes in their pocket books. They will vote accordingly.
But to the stock market, the part of Repeal and Replace that is important is the tax savings that will occur (an estimated $1 trillion) by stripping away some of the Medicaid provisions that presently exist under Obamacare. This would free-up Congress to address tax reform, given that they will now have a nice chunk of change to start the process.
It might also breathe some life back into the Trump agenda. The new president's image (despite tweets to the contrary) has suffered from a perceived lack of accomplishments in his first 100 days. There have been several legislative set-backs from healthcare, to funding the "Great Wall," to barely passing a temporary measure to fund the government and then only to September.
President Trump needs a "win" and tax reform is something that is near and dear to Wall Street, as well as to businesses in general. Since the House failure to pass health-care legislation, the markets have been in limbo. What investors need is some visibility; some assurance that a Republican-led Senate, House and administration can accomplish more than a divided Congress could over the past eight years. So far the jury is still out.
@theMarket: 100 Days Does Not an Economy Make?
Markets by their very nature are impatient. Every day they are open, something, somewhere has to be making traders money. Applying that behavior to either Donald Trump or the overall economy would be a mistake.
Nonetheless, it is what it is, Friday's first quarter GDP data, which measures the pace of growth in the U.S. economy, came at a dismal 0.7 percent. That was far less than expected. Most economists were expecting a number closer to 1 percent or more.
The response from Wall Street was "where's the beef," meaning that there has been little to no evidence that our new president has done anything whatsoever for the economy. But what about all the new hope corporations and investors are supposed to be feeling? Well, hope doesn't pay the bills or seemingly goose investment spending very much. Fixed investment in the nation's plants and equipment only expanded by a measly 1.6 percent.
To be fair, the first quarter in just about every year tends to be the weakest. Economists call it "residual seasonality." You can think of it as the after Christmas economic hangover when spending dampens down as the credit cards bill come due. Most traders know this, but hey, if there are suckers out there that are dumb enough to sell stock because of it then ... .
I'd rather listen to folks like Ben Bernanke, former Fed chieftain, who thinks that a combination of low inflation, low interest rates and global growth not only justifies the level of the stock market but may point to further gains ahead. Bernanke thinks very little of the market's rise is predicated on additional U.S. fiscal policies.
And now that our new president is reaching the 100-day mark, the temperature on Wall Street has cooled a bit. Many traders are beginning to temper their enthusiasm for "huge tax cuts" when the reality is that just because it's tweeted does not make it so, at least anytime soon.
If you were spelunking in Afghanistan or excavating mummies under pyramids in Egypt, you probably missed the administration's new tax proposals. The rest of us now know that Trump aims to reduce individual tax brackets from seven to three. He also wants to eliminate most of our tax deductions with the exception of charity gifts and home mortgage interest deduction. Tax-deferred contributions will also be spared the knife.
However, state and local taxes would no longer be deductible, which is a blow to those of us who live in the Northeast where taxes are high and so is income. It is also an area that was notably Trump-unfriendly during the election. But before you get your drawers in a tizzy, remember that this is only a broad proposal and the final legislation that is passed will be a lot different.
The stock market, however, seems to have taken all of this in stride.
I wrote last week that I was looking for the S&P 500 Index to breach 2,360 and remain there for a few days before I could give the market an "all clear." Thanks to the primary elections in France last Sunday night, that's exactly what happened. Since then the S&P 500 has traded above that level.
I believe the markets have been supported by a fairly good earnings season where the vast majority of companies are beating earnings expectations. What, to me, is even more important is that a growing number of countries are berating on the revenue number as well and giving improved forward guidance on sales. Since it is definitely more difficult to manipulate sales than it is earnings, I view this as an important development.
If you took my advice, you weathered a shallow pull-back of at worst 3 percent. My expectations were for a sell-off no worse than 5-6 percent. Now I expect markets to climb higher with the S&P 500 possibly tacking on another 50 point or so in this quarter.
@theMarket: Uncertainty Descends Upon the Markets
Pick your poison — U.S.-Syrian strife, weak employment numbers, China-U.S. relations — those are just some of the issues investors had to contend with this week. Despite these potential roadblocks, the averages hung in there, losing little ground as the week closed.
There was even more bad news, if you include the latest minutes of the Federal Reserve Bank's FOMC meeting. There was much discussion among the members and a chorus of assent to begin the delicate task of reducing the Fed's $4.5 trillion balance sheet later this year. Recall that the Fed bought mountains of U.S. Treasury bonds over the last eight years in an effort to keep interest rates low (and stimulate the growth of the economy).
Now the bankers feel it may be time to start selling those bonds back into the market.
They reason that the economy and the gains in employment are strong enough to weather such a move. Since this effort would be in addition to the two or three rate hikes already planned for later this year, investors are worried that even higher rates could provide an obstacle to further stock-market gains.
I remind readers that it is the path of interest rates this year, and not the success or failure of the Trump agenda that will worry me most. And speaking of the Trump agenda, Paul Ryan, the speaker of the House, cautioned investors (just before taking a two week recess) that cutting taxes may take longer than expected. That did not play well on Wall Street either.
As the week's uncertainty continued to build, President Trump's meeting on Thursday and Friday with his Chinese counterpart, Xi Jinping, had everyone biting their nails. Would there be a trade war? Would China agree to reign in their client state, North Korea? Of course, in predictable fashion, the psycho who runs that country, Kim Jong Un, chose this week to shoot missiles into the sea off the coast of Japan.
And just when Wall Street thought tensions could not get any higher, "The Donald" drops 59 Tomahawk missiles on top of a Syrian airbase in retaliation for the gassing of innocent people by that country's resident psycho, Bashar al-Assad. This U.S. strike took place in the middle of Trump's state dinner with Premier Xi. Talk about drama!
Overnight, stock index futures took a drubbing, but regained almost all of their losses by the time the markets opened in the U.S. on Friday morning. But then, the non-farms payroll report was released. Only 98,000 jobs were added in the month of March, while economists' estimates were in the 175,000 jobs gained vicinity. That took the wind out of the bull's sails once again.
Yet, here we sit with only minor declines on the day once again. That tells me two things.
That the pullback I predicted several weeks ago is still working its way through the markets.
That is a good thing. We could still drop another 2-3 percent from here. All-in, I have been expecting a 5-6 percent decline. To date, we have only experienced about half of that.
Number two, it bolsters my belief that the market's shallow decline will be followed by more upside. The markets have had every excuse to "crater" this week, but each time they fell, buyers appeared. There has been no panic, no sell-at-any-cost price orders that might indicate a more serious decline.
Both the bulls and the bears are hoping for more downside right now. The bears want to be vindicated in their belief that the markets are overvalued and overdue for a correction. My sense is that even the bears only want to make a little money, close their shorts, and then "go long" stocks. The bulls simply want to add to their existing positions, preferably at a cheaper price.