@theMarket: Ignore the Noise and Profit
The world is in turmoil. The news is all bad. Trump is threatening to up the ante on tariffs. NAFTA is kaput. Our trade partners hate us. China won't back down and, if you have time to spare, you are reading about immigrant kids locked in Texas dog cages by order of the president. So why is the stock market holding up?
The fundamental reason remains the same. Under all the muck, there is and will continue to be a bid under the stock market. In past columns, I have explained why — corporate stock buybacks, M&A, higher dividends coupled with a strong economy and low-interest rates.
If you look at the technicals, which I do, every sell-off seems to stop at a technical support level. In addition, while the Dow Jones "Industrial" Average put together eight down days in a row (it hasn't done that for over 15 months), small-cap stocks were hitting record highs.
Why the divergence? Most of the Dow is made up of big industrial companies with a high exposure to overseas markets. Tariffs mean less business; less business means lower stock prices. Small-cap stocks, on the other hand, are U.S.-centric. They rarely export and most of their fortunes are tied to the U.S. market. Ever since the trade wars began in earnest, small caps have soared.
Over in the technology space, the same thing is occurring. While commodity stocks are getting crushed (tariffs are bad for trade), large-cap technology and biotech are soaring. That's largely because the world can't do without the products those sectors offer.
The point is that traders are having a field day, shorting the markets on every tweet, and buying them back when the indexes hit a certain support level. Selling material stocks and buying tech, then doing the opposite when the circumstances change. And this will continue. My advice is to just ignore the noise and take a long-term view.
This week it was another missive from our Tweeter-in-Chief that sent investors into a tizzy. Trump threatened to levy 10 percent tariffs on another $200 billion of Chinese goods, if China retaliated on the president's first round of trade tariffs. China seemed unfazed by the tactic. So far, this week has been a war of words not actions.
Investors should not underestimate the Chinese response, nor assume that it will be confined to tariffs. Kim Jong Un made yet another trip to Beijing this week without fanfare or announcements. Trump assumed that after his historic meeting with the North Korean dictator, he removed that bargaining chip off the trade table. China could be putting it right back in its hands.
U.S. Treasury bonds could be another chip on the table. China holds a lot of them, as do other countries. Over the last two months, foreigners have sold about $5 billion/month of our debt. Analysts believe that selling our bonds would hurt the Chinese as much as it would hurt us. That's true, but in this trade war, both sides seem willing to suffer to achieve their ends.
Clearly, for the U.S., reducing both exports and imports would wipe out most of the impact of the tax cut. Since the economy is enjoying a faster growth rate this year, (almost 3 percent in the next quarter or two), we could probably absorb some of those negative impacts. The same thing could be said for the losses we would suffer in jobs.
Given that the economy is hovering at a historic level of unemployment and may drop even further to under 3.8 percent, it would be an ideal time to be hit with some job losses. Throwing a million or two Americans out of work, as a result of trade wars wouldn't be the end of the world from an economic point of view. Of course, you or I might feel quite differently if it was our job that was on the line. Nonetheless, in this world where even the most obvious of truths can be blamed on others (and believed by many Americans), why not bet the farm since it's not yours anyway?
@theMarket: Trump's $50 Billion in Chinese Tariffs Trashes Markets
Investors waited all week for President Trump's verdict. On Friday, he did not disappoint his followers. He decided to move ahead with plans to slap $34 billion in tariffs on Chinese imports. Stock markets worldwide fell on the news as investors await a Chinese response.
And China will respond. Chinese trade officials have already outlined their planned retaliation. China will match Trump's 25 percent tariff on 818 products by doing the same on 106 American goods worth about $50 billion.
We can expect an accelerating war of tit-for-tat tariffs in the weeks ahead. For example, the United States Trade Representative plans to add an additional 284 Chinese imports to their list (amounting to another $16 billion) by July 6. You can bet China will respond in kind.
Some on Wall Street still hold out hope that these tariff threats could still be averted. Although these tariffs could be implemented as early as next week, they could also be delayed if negotiations between the two nations continue. The White House could conceivably wait a minimum of 30 days or as much as 180 days if they chose to do so.
There are several other issues that can come into play on the trade front. European nations this week released a list of counter tariffs they plan to implement in response to Trump's 25 percent tariffs on their steel and aluminum exports. In addition, both Mexico and Canada have already released tariffs on U.S. imports of their own. We could see a virtual avalanche of global tariffs that could bury investors up to their necks.
While many businessmen and corporations are horrified at the administration's actions, others think it is the best thing that could have possibly happened. Clearly, the weight of historical evidence indicates that everyone loses in a trade war. If opposing forces respond in kind to another nation's tariff increases (as they are now), the result would logically be a reduction in global trade, which, if it continued, could result in a second Great Depression.
Yet, after decades of getting the short end of the stick in trade deals, as the president claims, how else do we, as a nation, change the status quo? Are there other, less dramatic, methods of accomplishing our national objectives? Of course there are, but those methods would require months, if not years, of negotiations by trade experts. However, that is not the hand we have been dealt.
None of the administration's top men have that kind of expertise. Nor would it matter if they did, because Donald Trump does not have the patience, disposition, or knowledge to pull that off. No, in Trump's case, it will always be "his way or the highway." Get used to it.
As for the markets, it is interesting to note that the stock markets are no longer declining as they did in February and March at every tweet on trade. It appears market participants, while still responding to short-term headlines, are keeping their eyes on the longer-term prospects of a stronger economy and better earnings. While we remain in a trading range, this one seems to have an upward tilt. Higher highs and higher lows continue to support stocks.
In the coming weeks, we could see even more volatility as nations rattle their sabers on trade, but depending on where you live or where you work, not all is gloom and doom on this front. If you are a soybean farmer, a worker that depends on low-cost steel and aluminum to keep his job, or possibly an auto worker (if tariffs on autos is next on Trump's tariff list), then tough times could be just ahead for you and your family.
But a banker in North Carolina, a small business owner in energy-rich Texas, or a tax-conscious, elderly millionaire that wants to make as much as he can before passing on his wealth to his beneficiaries are more likely to approve of Trump's tariff strategy.
In a polarized country where "getting and keeping your own" supersedes the common good, a trade war that hurts others can be easily rationalized away. As long as it remains "the other guy's problem," and not yours, what's not to like? Commerce Secretary and billionaire Wilbur Ross warned that Americans would feel some pain in the months ahead because of trade issues. We will, but you can bet that Wilbur sure won't be feeling it.
@theMarket: Another Week of Market Volatility
As the month wound down, so did stocks. Pronouncements from Washington dominated the market's direction on a daily basis. We can expect to see that trend continue as the summer doldrums reduce liquidity and exaggerate market swings.
The adage of "sell in May," however, did not fulfill the bears' expectations this year.
Actually, the month of May has been pretty good for stocks recently. The S&P 500 Benchmark Index gained a smidge over two percent for the month this year. That's not to say those gains were easy. The stress level for those who are trying to trade this market is through the roof.
And that's because two opposing trends are impacting the financial markets. The first is short-term volatility caused by political events. At the moment, these are mostly trade-related: tariffs and counter-tariffs, NAFTA concerns, and China trade. All of the above have generated a war of words (or tweets) and, depending on someone's mood in the morning, can spark 1-2 percent movements in the index in either direction. The falsehoods, about-turns, and misinformation have day traders going crazy.
And don't forget the international events. This week, Italy dominated trade, as a political/financial crisis may be brewing in Europe's fourth-largest economy. A new prime minister, Guiseppe Conte, was appointed Friday as an uneasy coalition of populists and right-wingers agreed to compromise in the wake of a severe financial downturn in Italian financial markets this week.
We will wait for future developments (see my column published yesterday on the subject) before giving the green light to Italy and Europe. At the same time, the Trump/Kim show continues. The off again, on-again charade is accomplishing what both egomaniacs want most: more time in the limelight.
Then there is the longer-term trend, which centers on real fundamentals: unemployment, inflation, interest rates, global growth and the like. All of these indicators are still flashing positive for the stock market. As readers know, I have been urging investors to focus on that trend and ignore the noise caused by all the short-term, headline-grabbing events.
Take today's much-heralded employment report. The U.S. unemployment rate has just hit an 18-month low at 3.8 percent. We haven't had a lower rate since the year 2000. Wage growth came in at 2.7 percent compared to a year ago. That is a stellar performance, no two ways about it.
This report, however, was marred by controversy. Prior to its release, Donald Trump tweeted a "heads-up" that he was "looking forward to seeing the employment numbers at 8:30 this morning" — obviously a tip that the numbers would be good. Federal rules (as Trump knows but ignored) state that no one in the executive branch can comment on major economic reports until an hour after they are released. Since few individuals (but almost all institutions) trade in the hours before and after the markets open, Trump's comments enabled bond, currency, and stock market futures traders at big institutions to profit from this information.
At the end of the day, what matters is the economic trends, and right now the trends are your friends. Until the data say otherwise, investors should remain invested, ignore the short-term volatility traps and enjoy the summer.
@theMarket: Nothing Memorable in the Markets this Week
Most indexes ended the week where they started. While day traders may have lost or gained from intraday moves, serious investors simply ignored the constant and contradictory stream of news coming out of Washington.
It isn't worth the space to comment on all the on-again, off-again series of tweets and statements that has become part of our daily diet. The main events that did carry some substantive weight were the House rollback of the Dodd-Frank rules. This easing of regulations on all but the largest banks, removes the required ‘stress tests' from most banks. While it relaxes some of the more stringent rules on banks, it does continue to regulate those areas that ushered in the financial crisis.
Bank stocks, which had already run up in anticipation of these changes, sold off on the news. Financial analysts believe that the new rules will trigger a wave of mergers and acquisitions among regional banks now that the government will be no longer watching every move they make.
The Federal Reserve Bank's minutes from their May meeting were also released. It gave market participants some hope, at least for a day or two, that the Fed would remain accommodative regarding interest rates. None of the members seemed worried that the economy could be overheating.
While June and probably September rate hikes are still on the table, the Fed members appeared to be relaxed when it comes to their inflation targets. Inflation hit 2 percent in March, but the central bank does not appear to be overly concerned that it has reached that number. Some believe it won't remain there and will fall back in the months ahead.
I guess the biggest disappointment for investors was President Trump's announcement that the June 12 summit meeting between him and Kim Jong Un is now off the table. Stocks worldwide sold off on the announcement. Whether or not this is just one more tactic in Trump's "Art of the Deal," remains to be seen. However, investors should realize that many of the issues between the U.S., North and South Korea, and China are not going to be resolved by a one-time meeting of these two leaders.
For example, Kim's sudden change of heart over his nuclear program, which occurred in late April, may not be all that it seems. Last month, the University of Science and Technology in China revealed that the mountain above North Korea's main nuclear test site at Punggye-ri had collapsed following a nuclear test in September of last year. Estimated at 100 kilotons, the blast was the sixth test and ten times stronger than any of the previous five.
As a result, a wave of earthquakes rocked the mountain and surroundings, creating so much tectonic stress that parts of the mountain collapsed, and fissures appeared throughout the mountain. Scientists believe that any further tests within this mountain range could generate a "critical failure" that could cause a wide-scale environmental disaster. Although no radioactivity has been identified along the China-North Korea border, Chinese scientists fear that radioactive dust could be leaching through tunnels, cracks and holes in the mountain.
Adding weight to this news, despite the name calling and North Korea's threats to drop all efforts of denuclearization this week, Kim went ahead and carried out the demolition of all the tunnels leading into its nuclear testing facility in the mountain. Why?
I'm guessing all these good-faith efforts by Kim are a sham. Contrary to his public statement that his nuclear weapons program is "complete," it is far from it, but his main testing facility has become a radioactive hell hole. China's concerns that the spread of North Korean radioactivity is a clear and present danger is probably the real reason for Kim's supposed change of heart.
In any case, we will continue to hear more on this. Meanwhile, the markets will continue to consolidate, until they don't. Once this period comes to an end, we should resume our climb higher, so stay invested.
Please take a moment this weekend and remember the fallen. I know I will. Semper Fi.
@the Market: Stocks Look Ready to Reach New Highs
The S&P 500 Index had its best week in two months. All the averages made good gains and investor sentiment numbers are improving. We could see a return to the January highs before summer unless something comes out of left field.
Left field has become a familiar place for the markets under the present political regime, but not all the news has been negative on that front. Take the release of three American prisoners by North Korea as an example. Kudos to the president for that one. Then there is the Iran nuclear deal — another campaign promise kept. Why are these important?
An American politician willing to keep his campaign promises is a historical event, in my opinion. The June 12 meeting between Kim Jong Un and President Trump is another fabulous breakthrough. Those remarkable actions can and have impacted investor sentiment in ways that have lifted hopes and with them the markets.
The jury on bowing out of the Iranian nuclear deal is still out. Readers may recall that back in 2015, Iran agreed to curb its nuclear development efforts in exchange for the lifting of severe economic sanctions. The U.S., U.K., Russia, China, Germany and France all signed the agreement.
At the time, many Americans felt it was the best deal that could be had. Suspicions remained, however, that Iran, despite the treaty and its denial that it ever had a nuclear weapons program, would and could continue to develop that effort secretly. Just days before the president's decision to back out of the deal, Israel released a mountain of documents detailing what they believe was Iran's clandestine, decade-long nuclear weapon program.
Whether it was the Israeli documents that decided the president, or something else, the deed was done. Why is this important to investors? Oil.
Iran is the world's fifth-largest oil producer, pumping 1.5 million barrels/day in an already tight energy market. Taking that supply off the market via new sanctions provides additional fuel stoking the already-accelerating price of oil. For my view of oil prices and where they are going, please read my column "What's up with oil?"
However, it is not always what it seems in geopolitics. The other signatory nations are steadfastly opposed to America's unilateral departure from the treaty. As such, it is a distinct possibility that the remaining treaty nations will simply ignore our departure, disregard the sanctions, or, in some cases, give lip service to sanctions but direct their companies to simply carry on as usual. If so, that sanctioned oil will be re-routed to China, India, or parts of Europe, leaving the U.S. decision ineffectual and the Iranians free to continue along their nuclear path.
As for the gains in the stock market this week, credit goes to the president's actions and a stellar earnings season. The average earnings gain was 25 percent (18 percent minus the tax savings). Thursday's consumer inflation data also helped. The Consumer Price Index (CPI) came in lower than expected, leaving traders to believe that inflation is still reasonably under control. In which case, the Federal Reserve Bank need not raise rates any higher than the market expects this year.
As for all this worry about "peak earnings," the historical data somewhat contradicts those concerns. Seventy percent of the time since WW II after peak earnings were reported on the S&P 500 Index, the markets were higher nine months later. I hope that helps. I'm thinking we go higher, after some profit-taking in the coming week. The S&P 500 Index should hit 2,800 soon. From there, it is only a hop, skip and jump to record highs of 2,872 made back on Jan. 26.
I'm not quite sure we will get there this month and there will be pullbacks galore, but we are heading in the right direction.