@theMarket: Stocks Set for a Volatile August
This month would be a good time to go on vacation. Otherwise, you might be tempted to do something rash like chase stocks or sell at their lows. That is the kind of market volatility investors should expect in August.
The market's trading range is still intact and should continue and keep stock market values corralled into September and probably October.
We had our moves up to the old highs (or slightly beyond) in most of the averages in July. A combination of anticipated stellar second-quarter earnings and somewhat less rhetoric from the "Trumpster," allowed equities to notch their fourth month of gains. Second quarter earnings have come in as expected for the most part, but much of that excitement is behind us. We still face the prospects of a trade war and all that might entail. The Fed is on hold until next month, but the bond vigilantes are expecting the central bank to raise rates again in September.
In the absence of any market-making good news, it would be a safe bet to expect stocks to drift lower by a couple of percentage points.
Since the real action won’t start until after Labor Day, any pullbacks or melt-ups will be trader-induced, on low volume and are as liable to reverse at odd or unpredictable times. This could last a few weeks until the algos and day traders exhaust themselves. By the end of the month, watching grass grow should be more exciting than watching the tape.
Since I am not a political analyst, you — reader — will have as much insight as I do on whether the GOP will maintain their majority in the House and/or Senate, or cede those positions to the Democrats. The question to ask is how the markets will react to the mid-term election outcomes.
If the GOP emerges victorious, I suspect stocks will rally. If the Democrats win, there may be a bit of disappointment, at first, but then markets will soon realize that a stalemate in Congress is a good thing for the markets.
In prior years, when Congress was divided, (think the Obama years), markets rallied because the logjam in Congress meant no new legislation. That equaled predictability and removed politics from the investment equation. Remember, investors like an atmosphere where
they can count on the status quo to continue. Granted, it may not be good for the country, but it is usually good for stocks.
The caveat must be Donald Trump. Nothing about the president is predictable. With a hung Congress, he may well resort to executive orders to advance his objectives. He may even reach across the aisle in some areas to forge a deal with the Democrats. I would expect a divided Congress would also increase the pressure on the president personally, as well as his cabinet, in the Russian investigation, personal finances, etc.
If the Republicans win, and Trump also increases his base support, it is anyone's guess on how the markets will react.
On one hand, Trump's Transformation of America would likely proceed with the ship moving at full-speed ahead. More tax cuts for the wealthy, the Wall will finally go up, immigration will slow to a trickle, business will enjoy even more benefits and the markets would
However, a full-blown trade would also become a real possibility. Higher tariffs would spark runaway inflation, interest rates would spike higher, the deficit would balloon, while tax revenues drop. Economists and Wall Street, alike, are convinced (although Main Street is not)
that the kind of tariffs Trump is threatening will not only hurt the U.S. economy but would most likely sink the global economy. A combination of all the above would be a "bridge too far" for the stock market, in my opinion.
In any case, preliminary polls (if they can be believed) indicate a tight race. Traders are already re-programming their voice-activated computer trading bots to sell or buy on the latest polls. The media, social and otherwise, will have a field day extrapolating every nuance and wrinkle of the race.
And, of course, we can count on a continuous stream of tweets cascading from the White House interrupted only by the delivery of yet another Big Mac with fries. Given that scenario, you better rest up now because this Fall could be a real humdinger.
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The Independent Investor: The Incredible Shrinking Stock Market
There was a time, back in the late Nineties, that publicly-traded stocks were the envy of all companies, great and small. But times have changed, and since then the number of public companies have fallen by 50 percent.
You might have missed that trend, however. That's because the market capitalization of equities has been increasing for a decade. This year the market cap of the U.S. stock market hit a record $32.2 trillion. Globally, the World Bank estimates stock market capitalization is above $80 trillion. The largest contributor to this trend has been the large increases in stock prices.
Bottom line: investors are simply bidding up the prices of existing stocks in an incredibly shrinking market.
The peak year for publicly-traded companies was 1996 when there were over 8,000 companies listed. Since then the number has gradually decreased until today, where only 4,336 companies remain in the public sphere. The same trend has been identified in developed markets around the world. European and Canadian stock market trends mirror our own with listed companies falling by anywhere from 20 to 60 percent overseas.
There are several reasons why listing your company on an exchange has lost much of its luster.
Most companies complain of an increasingly complex and expensive mountain of governmental and industrial rules and regulations they are required to obey. Despite the Trump administration's effort to reduce this onerous burden, few companies are planning to reduce their law departments any time soon.
Then there is the media and an increasingly active shareholder base. Every move, every action by management is scrutinized, analyzed and sometimes reported inaccurately by the financial media. Shareholders, both active and passive, respond to the news in a vicious circle of give and take. Short-term activists demand change to "increase shareholder value." Often, these same activists are only interested in goosing the stock price for their own benefit over the short-term.
That's because public companies are increasingly judged by their short-term results. Quarterly earnings performance is a do-or-die event for managements. Wall Street analysts demand guidance on sales and profit numbers that better come in on the nose or else. And more and more of top management's time is spent appeasing these analysts, shareholders and the media. All of which takes time and effort that could be better spent on running their company.
The nature of the stock market has also changed. Back in the day, when a company needed to expand, it went to the stock market to raise that capital. The public market also provided a means for the owners and employees of private companies to "cash out" their sweat equity. But today, there are other means to accomplish the same ends.
More and more large private companies do not need to be listed to raise capital or reward employees. Venture capitalists and other well-heeled investors are only too happy to provide the money in exchange for ownership in the future growth of these private companies. As a result, more and more companies are waiting to go public, enjoying more of the fruits of their labor and sharing less of it with public shareholders.
Leveraged buyouts (LBOs) have also come into vogue. Managements, fed up with the demands of their public companies, have chosen to take their company private by enlisting outside investors to take the company private through purchase of their stocks. These LBOs come in all colors and stripes and have played a big role in the ever-shrinking number of public companies.
Given the nature of the stock market and its participants today, staying or going private may be the right decision for many companies. The downside is that we, their potential shareholders, are being shut out of the opportunity of participating in the lion's share of profits and growth of these future Apples or Googles. Instead, we are simply forced to pay more and more for the same old lineup of public companies.
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@theMarket: Markets Remain Range-Bound
It's the same old song. It has been playing over and over since the end of January. Higher interest rates, a stronger dollar, and, of course, the inevitable and meaningless stream of tweets from our Tweeter-in-Chief are keeping stocks range-bound. How long will this condition persist?
Both the Dow Jones Industrial Average and the S&P 500 Index have now posted their longest consolidation since 1984. The two indexes have been in correction territory for 113 trading days. That is a longer stretch than we have seen in decades — including the period of the 2008 Financial Crisis.
In 1984, it took the S&P 500 Index 122 days to emerge from the swamp, while the Dow required 123 days to do it. Only two of the last 20 corrections lasted for more than 100 trading sessions. The average correction length since the inception of the S&P 500 Index is 51 trading days. The absolute longest period was 229 trading days, which happened in 1978. So what?
The 2,810 level on the S&P 500 Index is providing strong resistance to the bulls, while the 2,700 level has been hard to break on the downside for the bears. The historical 12-month high for the index is 2,872.87. That's a mere 2.5 percent from here. So all-in-all, investors have nothing to complain about. We are up about 4 percent year-to-date — not bad, given the remarkable performance of last year.
Remember, we had little to no pullbacks in 2017. The average's 20 percent-plus gain was an almost straight-up phenomenon And that, my dear reader, was abnormal. A reasonable investor would expect to see at least half of that gain back, which occurred in February through March. Since then, we have been consolidating.
This should not be a surprise to my regular readers. It has been my investment theme for months. I would say that stocks are doing well, given that we are in a rising interest rate/strong dollar environment. Despite these head-winds, corporate earnings are continuing to come through on the bottom, as well as the top line.
Yes, there is some worry and gnashing of teeth over what might happen if the trade war expands, but so far in this earnings season, few companies are actively cutting back on investment. They are just not increasing investment.
At the same time, corporate cash continues to be repatriated ($308 billion in the first quarter). While the argument by the president and the GOP that a return of this off-shore money would fuel capital spending was totally bogus, it did — as I predicted — manage to support the stock market. Almost $190 billion of that money has been used to buy back stocks so far.
Donald Trump's escapades — from his embarrassing and fumbling attempts at foreign policy, to his "unhappiness" with rising interest rates and the Federal Reserve — continues to amuse, bemuse, and in some corners, concern the 61 percent of Americans who are outside of his base. What he says or does might move the markets for a day or so.
Friday, for example, it was his threat to levy tariffs on all $500 billion worth of Chinese imports to the U.S. The Dow dropped almost 200 points, but by late morning, it had recouped those losses. It may be that Wall Street is simply tired of his posturing. In which case, I suspect he will just up the noise level until investors are forced to respond to his tantrums.
My short-term bet is that traders will try to push the averages higher, maybe back to the old highs, before failing once again. In a market where your fortunes are wholly dependent upon the next utterance from the White House, I can only guess. However, my longer-term view is that the tariff issues and the mid-term elections will keep the markets in check through September and into October.
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The Independent Investor: Tariffs — The Next Chapter
Tariffs on $34 billion in Chinese imports were imposed, as expected, last week. China responded with $34 billion of their own tariffs on American imports. So far, this has been a zero-sum game. The question that investors are asking is whether or not the trade war will escalate.
I could say that this entire trade spat has been "much ado about nothing." The total amount of trade tariffs and counter tariffs don't add up to much given that China is a multitrillion-dollar economy. The war of words and threats between our once-allies, our antagonists, and the president, amount to much more.
Right now, Trump's statements would indicate he is ready to impose $500 billion on Chinese imports alone. If the Chinese (as they have promised) respond by levying a like amount on U.S. goods, we could see $1 trillion or more in additional tariffs. That would hurt the U.S. every bit as much as it would hurt China. If we also consider Trump's trade war on other fronts — Europe, Asia, emerging markets — then, look out below.
We also need to consider how this tariff issue will impact consumer and business confidence. If the tariff threat escalates, it will damage confidence, which, in turn, will reduce the potential for spending and capital investment. That would lead to an abrupt and sudden decline in economic expansion and the end to the bull market in stocks.
How likely is that? Not very, in my opinion; at least for now. In the meantime, the president and his men have managed to turn our allies into antagonists, while giving the Chinese an opening to fill the vacuum we are creating in U.S. international trade. America's attitude toward this development is predictably smug.
"The world needs our goods, especially technology," say the protectionists, "so what do we care that the Chinese will gain market share at our expense?"
As someone who has spent half my career investing in foreign markets, I can tell you that attitude is naïve at best. The global marketplace is extremely competitive. Companies respond to protectionism by moving jobs, plant and equipment to the areas that offer them the highest competitive advantage while down-sizing in those areas that don't.
This is already happening here at home: "Capital spending had been scaled back or postponed as a result of uncertainty over trade policy," wrote the Federal Reserve Bank in its latest meeting minutes. U.S. companies "expressed concern about the possible adverse effects of tariffs and other proposed trade restriction, both domestically and abroad, on future investment activity."
Consumer spending also slowed in this year's first quarter, registering the weakest growth in five years. The jury is still out on that front, however. We will need to see the second quarter numbers before we make a judgment call on spending.
Another unrealized impact of tariffs will be their contribution to the inflation rate. Tariffs do one thing: increase prices. While most investors worry about a tariff war's impact on overall trade, much of world trade will continue, but at higher prices. Tariffs are simply price increases levied by governments and paid for by consumers and business.
The markets are expecting a gradual increase in interest rates as the U.S. central bank works to normalize interest rates after years of easy monetary policy. What they fear most is a spike in inflation. They are already concerned that U.S. labor shortages are reaching a critical point. As companies compete for workers, wage growth will rise and with it the inflation rate.
The last thing the economy needs right now is a trade war, but it seems the president, in his wisdom, believes the opposite. Let's hope he knows something that we don't.
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@theMarket: A Wash-Rinse-Repeat Market
There was nothing to see in the markets this week, simply more of the same crisis news that may keep the media happy, but no one else. Tariffs and trade remain in the forefront and will continue to do so. What should investors do?
Just move on and enjoy your summer. The Fourth of July falls in the middle of the coming week with stock markets closing for half the day on Tuesday. As such, many professional traders will take the entire week off. Given that the Northeast faces their first summer heatwave as well, the corridors of Wall Street should be quite empty.
So whatever ups and downs the stock market may have next week will mean little to nothing. Those who must remain at their trading desks will be young, bored, and trying to make something "happen." Don't get sucked into it, because whatever will be done next week will probably be undone in the following week.
It should be abundantly clear by now that the continued antics coming out of Washington hold the key to short-term price movements in the markets. As a long-term investor, I have repeatedly advised you to ignore the small stuff and keep focused on the horizon, where things still appear bullish.
By now, you are probably aware that the administration floated a new trial balloon last weekend in their on-going trade war. They suggested that they might ban technology exports to China and other nations on the grounds of national security. That sent the U.S. markets crashing on Monday. By the end of the day, with the Dow down over 500 points, Trump sent out both Treasury Secretary Steve Mnuchin, and Director of Trade, Peter Navarro, to do some damage control. Both men immediately contradicted each other, but, in the confusion, they managed to pull the Dow off its lows.
Tuesday proved to be another wash-rinse-repeat day with Larry Kudlow, the president's economic adviser, chiming in with more negative and confusing comments on the trade and technology issue. The markets, which had rebounded off their lows, promptly gave up all their gains and sank further. In the end, the administration canned the whole idea. Instead, Trump asked Congress to strengthen the laws already governing foreign investments in areas that may pose a threat to the nation.
In the meantime, Harley-Davidson, the American motorcycle icon, became the president's latest whipping boy. Readers may recall that this company was a specific target of the EU's retaliatory tariffs in response to Trump's tariffs on foreign-made steel and aluminum products. The European tariff (31 percent) was so effective that Harley announced it will move its production of European-bound cycles to Europe. The stock was down 7 percent on that announcement, as Trump lashed out at the company for "waving the white flag." Mid-Continental Nail, the largest manufacturer of nails in the U.S., also announced layoffs because of the steel tariffs.
Although the announcements came as a surprise to the president and his men, it shouldn't. Companies are not by nature political animals; they are economic entities required to answer to shareholders, not politicians. In the face of retaliatory tariffs by foreign countries, corporate managers need to worry about how that will impact their business. U.S. tariffs against imports will mean they can raise their prices here at home and make more money, but the opposite happens overseas in a tariff war.
To avoid the wave of retaliatory tariffs against American products, it makes total sense for businesses to shift production and jobs out of the U.S. and into the countries that have established these tariffs. Harley-Davidson is simply the first company to do so. Many more should follow if the trade war heats-up.
But all of that is still in the "what-if" stage of development. As I said, it keeps the media employed, but does precious little for you or me. Turn off the television, shut down the internet and ignore the newspaper headlines. Instead, go sit by the lake, pool, or ocean next week and work on your tan. Now that would be a productive use of your time!
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