@theMarket: Markets Bounce 10 Percent Since Christmas
The stock markets have gained almost one percent per day since the beginning of the year. If you had panicked and sold during the Christmas holidays, you are sitting in cash wondering when to get back in. Here is some advice.
Patience should be at the top of your "to-do" list. If you believe we are in a bear market, then the kind of rebound we are seeing in the equity markets is completely normal. Bear markets are characterized by waterfall declines followed by sharp, explosive upside rallies. Unfortunately, these fantastic trading opportunities are just that — trades.
If you are not living the markets every single moment, day-in, day-out, then forget about profiting from it. Most retail investors will get chopped up into little pieces and spit out by the proprietary trading desks and their quantum computers.
Once the markets' rally hits some kind of peak (usually, but not always a technical resistance point in the indexes), another waterfall decline will occur. Usually, this kind of action goes on until whatever low has been put into place is re-tested or breaks. That, my dear readers, is what I predict is in store for us sometime in the first quarter. How you handle that is up to you.
My advice is if you can't stomach the ups and downs of this market, you should take this opportunity to reduce your risk tolerance. That does not mean get out of stocks. It means reduce your exposure to the more aggressive areas of investment but continue to stay invested.
"Why," you might ask, "should I not just sell everything, get into cash, and wait for the markets to correct?"
That sounds logical, but it really isn't that simple. Let's take this most recent upside explosion in the markets. More than 8 percent of the move higher occurred on just two trading days. If you had been in cash, you would have missed 80 percent of the move. No one could have caught those moves unless they were invested.
On the downside, this is what might happen. Once we reach whatever bottom the market ordains, without warning, the markets will turn up. If you are in cash, you won't know what, where, or when that bottom will occur. You might think you know, but human behavior is such that you will hesitate, and hesitate, and hesitate until the market leaves you in the dust. Don't make this mistake.
The next hurdle that investors face will begin next week when fourth-quarter earnings season begins. Readers may recall my past discussions last year where I warned that peak earnings have come and gone. While profit results may still be positive in most cases, I expect they will be lower than in past quarters. The question is the degree by which they drop. Right now, analysts are expecting a 10 percent increase in earnings, which is half of last year's 20 percent growth rate.
About 20 percent of the S&P 500 companies have already warned that earnings would not meet investor's expectations. And those warnings have not been industry specific. Everything from retail to banks, autos to technology have been hit. These are developments that could precipitate another waterfall decline for the markets.
On the other side of the equation is the recent more dovish stance of the Fed. Fed Chairman, Jerome Powell has been using every opportunity to talk the markets down from their fear that he will continue to tighten, regardless of economic conditions. It is the chief reason that the markets have rebounded as much as they have.
Next week we will see who carries more weight: a less-hawkish Fed or disappointing earnings. If the bulls win out, I could see the S&P 500 Index tackle the 2,640-area next. For the bears, the downside remains the recent lows — 2,350. That's a huge spread, but that is the times we live in, so strap in.
@theMarket: The Trump Dump
The sell-off in stocks has now exceeded the 2016 decline. Investor sentiment is as low as it has been since May of that year. The Fed refuses to save us, and Donald Trump insists on his wall or he will lay off thousands of federal workers. Did I say Merry Christmas?
The reasons for this rout are well-known by now. The latest disappointment was on Wednesday when, contrary to investor's expectations, the Fed stood firm in their quantitative tightening agenda. For a more in-depth view of the reasons for their stance, please read my Thursday column "The Fed Stands Tall."
The markets expressed their unhappiness by declining 1.5 percent in the last four days. But it wasn't just the Fed. Last Sunday evening, China's President Xi Jinping made it clear in a speech celebrating 40 years of Chinese progress and reform that "no one is in the position to dictate to the Chinese people what should or should not be done."
In essence, Xi is calling Trump's hand while upping the stakes. He is betting that Trump has a weak hand. Between the continuing revelations of the Mueller investigation, the slow-down in the U.S. economy, a divided Congress, and his shrinking popularity among voters, Trump is, at best, a paper tiger.
Investors, in my opinion, are beginning to agree with Xi. Despite Trump's tweets and assurances, the trade war he has started won't be resolved anytime soon. As that understanding takes hold among investors, the markets are selling off. The prospect of a debilitating trade war has now permeated the economy. It is slowing growth, reducing earnings and transforming a fairly positive future into something unknown and potentially extremely dangerous.
It is also becoming increasingly clear that the tax cut, which was forced through Congress by Trump, Paul Ryan, and the Republican party, has been a colossal failure. It was the largest redistribution of wealth from the poor and the middle-class to corporations and the wealthy in the history of this country. It was sold as a way to incentivize corporations to invest in capital equipment, bring skilled jobs back, hire more highly-paid workers and generally "Make America Great Again."
It has done the opposite. To date, $1.1 trillion of the $1.3 trillion tax cut to corporations went into buying back stock. If you add in the money spent on increasing dividends, then all of the corporate tax cut has been squandered. I say squandered, because most of those share purchases were made at higher stock prices. In a sense, there is some poetic justice in that.
I have written in the past that corporations (through share buy-backs) and the wealthy (who own most of the equity in this country) have benefited the most from this tax cut. However, leverage works both ways. Both parties have now seen their stocks and holdings erase all those ill-gotten gains and are in jeopardy of losing a lot more in the months to come.
Thanks to the trade war, companies are shifting jobs and investments overseas. Forecasts of economic growth are declining. The lack of skilled American workers, combined with the much stricter immigration policies of the Trump regime has forced companies to pay higher wages to existing workers, but not new workers. Those higher wages, without a corresponding increase in productivity, is what ignites inflation. And now you see why the Fed needs to hold steady on its tightening course of action.
I have not even mentioned the growing list of concerns that are slamming investors in the face on almost a daily basis. The dissolution of the Trump family "charitable" foundation, the resignation of one of the administration's last reliable cabinet members, General Jim Mattis, the sentencing of two of Trump's inner circle — the list goes on and on. Readers may observe that just about every concern I have listed has one common thread — Donald Trump. And thus, my headline: The Trump Dump.
I will be taking a long holiday this year and won't be back until after the New Year. I wish all my readers a happy holiday season and hopefully a better 2019. In the meantime, the markets are due for a bounce. But as long as Donald Trump is in the White House and calling the shots, don't for a moment think this decline is over.
@theMarket: The Market's Winter Storm
Stocks worldwide have experienced a downdraft since October. All the gains so painstakingly made thus far in 2018 have been erased. Volatility has battered markets with all the severity of a Nor'easter. Next year may prove to be a continuation of the same.
It is interesting that the culprits responsible for this change of heart in the markets have been around for just about all of the past year. Leading the list is Donald Trump. It was our president that decided to wage a trade war against the world. There has been little success in his battle thus far. The prospect of more of the same faces us well into the new year.
The Federal Reserve Bank can also take some blame. After over a decade of "easy money," the new Fed chief, Jerome Powell, (appointed by Donald Trump), has decided to raise interest rates and sell $50 billion in Treasury bonds every month for the foreseeable future. In his own way, Powell is draining the system that has been swamped with money for years.
As a result of both the continued threat of a trade war and rising interest rates, the economy is slowing. It has not lost enough steam to threaten a recession, but it has removed the wind from the market's sails, to say the least.
Let us not forget the controversy raging across the pond. The United Kingdom is having a devil of a time pulling off their exit from the European Community. On the one hand, the EU doesn't want to make it too easy for this to happen, lest other members might follow the UK's lead. At the same time, the electorate, as represented by the UK Parliament, are not happy with the deal Prime Minister Theresa May has struck with the EU.
Finally, oil prices have collapsed since October. While the price decline has been a boon to the consumer, it threatens an array of companies related to energy production. Employment, capital spending, earnings and worries about debt servicing have added to the worries of stock investors as a result. In the recent past (2014-2015), declining energy prices put a large dent in the overall earnings of the S&P 500 Index of companies and could do so again.
As if all of the above were not enough, we are now faced with two immediate threats within our own political system. The House will be turned over to the Democrats in less than a month. And, within that time frame, the long-awaited Mueller Investigation should also reveal its results. Neither event is expected to help the presidency of Donald Trump.
Investors have no idea what will happen as a result of these developments. Will Donald Trump be proven right in his almost-daily denial of any collusion in regard to the Russian investigations? What if he is exonerated in part, but his family members are not? Has he committed any impeachable offenses in other areas? If so, how will that affect his trade negotiations or any future legislation?
In summary, few, if any of these issues can be resolved any time soon. Therefore, readers should expect the markets to exhibit the same kind of volatility into January and maybe into the end of the first quarter of 2019. That is not to say that many of the issues could turn out to be positives for the markets.
The Fed, for example, is already talking about easing up on the interest rate hikes. China seems to be amenable to further trade negotiations over the next three months. And who knows, Trump could turn out to have been right all along in blaming the entire Mueller probe on the fake news media and Democrat machinations.
In the meantime, expect stocks to ride a continued wave of wild swings of one percent or more almost daily in either direction. Most of these moves are fueled by computer programs that indiscriminately buy and sell stocks, sectors and entire country markets in a blink of the eye. My advice is to ignore these moves and wait out the storm.
@theMarket: Markets Hope for Trade Breakthrough
This Saturday evening, Donald Trump and Xi Jinping will sit down to dinner in Buenos Aires at the G-20 conference. Investors are holding their breath, hoping that the two might come to some agreement that could lower tensions and avert a full-out trade war between the U.S. and China.
Given past rhetoric and the president's mercurial temperament, anything could happen. Xi Jinping and his advisors, after years of dealing with Washington, believe if they just hang tough and wait Trump out, the outcome will be "business as usual" on their terms.
Unfortunately, Wall Street and the media have created another binary event out of the dinner. Either there is a breakthrough, in which case the markets roar higher, or there is no deal and stocks fall back to the lows and maybe break them. I wish it were that easy.
The trade relations between our two countries are complicated. I mean really complicated and no single dinner or event is going to solve it. A new economic relationship with China will take months, even years, and require talks on many fronts. Tariffs are just one small issue in these talks, although the president uses that issue constantly in his tweets and rallies.
Whether he is truly that naïve (a possibility) or is just using a dumb-down approach for the benefit of his political base, is unknown. His rhetoric on many other issues (immigrants, the wall, jobs, the media, Mueller, etc.) indicates that he believes his audience has little understanding and even less patience on the issues that beset us than he does.
Clearly, the president has had a "bad hair day" on several fronts this week. GM's announced layoff of 14,000 U.S. workers and the closing of several factories damage his MAGA claims of bringing high-paid jobs back home. Mueller's investigation looms closer and new revelations on his Russian dealings during the presidential campaign have surfaced. And then there is the stock market's decline, which the president believes is his true opinion poll. Something positive out of this weekend might distract the public from these negative developments.
If we consider his "new" North American trade agreement signed this week in Argentina as a template, there is a chance that Trump could claim another trade victory on the China front. Most readers have realized by now that only marginal changes were made in this updated Mexico, U.S., Canada trade pact.
He could use this same kind of sleight of hand in negotiations with China. We know, for example, that the Chinese have already offered a number of concessions to the U.S. on trade, although the administration has not been forthcoming in revealing the details. It would be easy (as it was with Mexico and Canada) to claim victory by simply accepting superficial changes to an existing trade pact.
As for this weekend, if I were passing the gravy, I would agree to a joint statement with Xi after dinner that indicates "progress." Some nebulous statement from Xi, such an increase of soybean purchases by China, or postponing the January deadline on tariff increases by the U.S. from "Don, the Con" could give the markets new hope without much content.
In the meantime, you may be wondering why the markets turned around this week. Fed Chairman Jerome Powell, in a speech before the Economic Club of New York, announced that interest rates were just below a level where further rate hikes might not be necessary. Investors liked that — a lot. As a result, the S&P 500 Index has gained back some of its losses since Oct. 3. It is now down 6 percent from the beginning of last month, and up slightly for the year.
Good news out of Buenos Aires could ignite a Christmas rally and send the Dow up 500-700 points in a short period of time. Bad news might do the opposite. As it stands, November was a positive month for the markets. Stay tuned for the fireworks.
@theMarket: It Is a Black Friday on Wall Street
Black Friday sales are in full swing. Normally, today is all about the retail trade. Consumers spend the day waiting in line, picking up heavily discounted "door buster" deals, and generally starting their holiday gift shopping. This year, it appears traders are also holding their own Black Friday sales.
The day after Thanksgiving, the stock and bond markets are open for a half day. Few turn up for work, so trading desks are usually manned by a skeleton crew, volumes are light and the indexes meander about the center line. As such, what happens on Black Friday has little consequence in the grand scheme of things.
The real action is before a holiday, especially one that coincides with a long weekend, like this one. In volatile markets, such as the one we have this year, few traders want to go "long" stocks through this long weekend. Their preference is to sell before the holiday and re-examine things when they come back on Monday.
This year, thanks to the Trump trade war fears, the concerns over raising interest rates, and a possible slowing of the economy next year, stocks continued their two-month, long decline on Friday. As I warned readers last week, if the S&P 500 Index failed to hold 2,720, the next stop would be somewhere around 2,600. That is exactly what happened.
So here we are testing the lows that we put in back in February. From a technical point of view, we have a classic case of a "double bottom." That's when stock indexes reach a low, bounce up, and then re-test that low once again. At times it only takes a few weeks or months. In this case, it took longer. Many times, a correction will not be over until a double bottom occurs. Are we at that point now?
I would like to say yes, so I will, but there are conflicting signals. Take sentiment indicators, for example. The number of bulls has dropped to a little less than 40 percent. That's a good sign if you are looking for a contrary indicator. But back in February, bullish sentiment hit a low of 24.7 percent. That would seem to indicate that investors will need to become even more bearish before this pullback is over.
We are also seeing some early signs of "divergence." Back in October, when the S&P 500 hit 2,600, the peak daily reading of new lows for individual stocks was just under 18 percent. But this week, those same stocks hitting new lows was a mere 4.16 percent. So, what?
When you have a situation where the broader market is making new lows (like Tuesday), while the percentage of stocks trading to new lows shrinks, it is considered a positive divergence. If we see this continue next week, it would be a signal that investors are being more selective in their sales rather than just committed to a wholesale selling of all equities. That would be another positive sign.
What would be a bad sign, is if the S&P 500 Index failed to hold this 2,600 level. That would indicate more pain in the near future and lower stock market averages across the board.
Against this backdrop, it is interesting to note that according to early reports, this year's holiday shopping season is starting off with a bang. Consumer confidence is fueling higher holiday spending, even while the stock market is selling off the retail stocks that will most benefit from this trend.
Hang in there, folks, this too shall pass.