@theMarket: Markets Feel the Heat
First, the good news: there is only one more week until the end of the month. The bad news, however, is that October may not treat investors any better than did September. As my swabbie friends would say, is it time to "batten down the hatches?"
Let me say I take no joy in being right. During the last few weeks of writing, the volatility I predicted has come home to roost. This kind of correction is especially painful because in these times of great uncertainty, we could have at least pointed to the stock market, and our investments accounts, as one piece of good news.
As I wrote last week: "Investors, therefore, should be mentally and emotionally prepared. If you witness days, or even weeks of ups and downs, don't be surprised. It would not surprise me to see several pullbacks, only to regain those losses, before selling off once again."
That quote sums up the market action throughout this week. All of the worries I have enumerated: the possibility of a winter wave of coronavirus, a slowing economy, the elections, and China trade have converged to drive most financial instruments lower.
Global stocks, commodities, interest rates, even high-yield junk bonds (the last instrument supposedly supported by the Federal Reserve Bank), fell hard. Gold, thought to be a safe haven, "go to" investment, was also clobbered, hitting a low of $1,850 an ounce late in the week. Only the U.S. dollar climbed, staging a big comeback from its multi-week lows.
After last week's declines, some investors hoped that we had seen the worst, but nothing has really changed. The president, who uses the stock market as his barometer of success or failure, added yet another worry to our growing pile of concerns. Wednesday evening, President Trump, in response to a reporter's question, refused to commit to a peaceful transfer of power, if defeated in November. It wasn't the first time the president has said that, but investors took his comments seriously this week. As for me, I chalk it up to campaign rhetoric, but it illustrates the point I have been making about volatility.
We have an entire month ahead of us in which we should expect heated comments from both sides on so many issues that I lose count. The Supreme Court vacancy after the passing of Ruth Bader Ginsberg is just the latest controversy, but there could be others. Driving further downside in the markets, for example, could be revelations dealing with the president's tax returns and/or Vice President Joe Biden's (and his son's) history with Ukraine. Further accusations of foreign interference in U.S. elections, and/or additional mail-in ballot issues could be with us up until, or even after, the actual November 3 election. All of these possibilities could add fuel to the fire throughout October's stock markets.
On the plus side, a coronavirus vaccine could be in the offing as early as next month, according to the President. While most pundits believe another stimulus deal is dead in the water until sometime after the elections, who knows? The Democrats are readying another stimulus plan with a $2.4 trillion price tag. That is down from the $3.5 trillion bill the House passed a few months ago and could be on next week's agenda for passage.
Unfortunately, the Republicans' Senate, with a few exceptions, does not seem willing to compromise, and they are sticking with their own $500 billion proposal. That could change if the markets really take a hissy fit. It might be just enough to get the two sides talking again.
Any or all of the above considerations could cause market swings of anywhere from 3-7 percent in both directions. It might be a day trader's dream, but it could also be their worst nightmare. My advice is to stay out of it.
If things fall apart from here, I could see the S&P 500 Index pull back into the 3,050-3,140 range. If the lower end of that guesstimate were to happen, we would be looking at a 15 percent decline from top to bottom. I hope not, but if so, take your lumps and wait until the smoke clears in November, or possibly December.
@theMarket: Investors Face a Rollercoaster Ride
Volatility returned to the stock market this week as the level of uncertainty increased on several fronts. Unfortunately, there won't be any definitive answers to what concerns investors for at least two months.
It is September, after all, and this month is notorious for inflicting pain on investors. Historically, October is not much better, and in a presidential election year it can be worse. While the financial media will provide their thoughts on just why stocks drop or rise on any given day, it is not much use to you.
The real reason for "why" will only be known after the fact. This week, the excuse for Thursday's and Friday's decline had to do with the Fed, or so many believe. But Jerome Powell, the chairman of our central bank, did not say anything new, nor did the Federal Open Market Committee meeting notes add any insight on Fed policy. The message that rates will stay lower, for longer, was repeated again with the Fed's timeline somewhere between infinity and beyond.
I suspect the disappointment for many was that the central bankers did not indicate their willingness to provide additional quantitative easing. In fact, one could infer that the Fed would be pleased if the long end of the yield curve started to move higher at some point. What that means is that shorter-dated bonds and notes would yield less than longer-term 20- and 30-year bonds. In a perfect world, that is what should be happening, but it's not thanks to the Fed's past stimulus efforts.
It could be why technology shares sold off, or at least that is my guess. These high growth companies normally borrow money at the long end of the curve, and invest that money in their businesses to produce even higher growth years into the future. If that cost of capital were to rise, it could clip the future growth rates of these high-flyers.
However, overall, the Fed assured us that whatever comes, it "has our back." And if so, why the sell-off? The simple answer is future uncertainty. The economic data is giving the markets conflicting signals. Unemployment, while dropping, is not happening quite as fast as the markets would like. Since there is no additional fiscal stimulus as of yet, the economy may still grow, but again just not as fast as investors would like.
Then there is the conflicting information on when a coronavirus vaccine will become available. Will it be in October, as some in the political arena contend, or will it be later, at the end of the year, or sometime in 2021? Since just about everything to do with the economy depends on that vaccine, investors' expectations are all over the place. And, finally, there is the presidential election.
This week, a new worry surfaced, centered upon the outcome of what might be a contested election. The prospect of a really close race where an avalanche of mail-in ballots is recounted, and where opposing parties squabble over every single vote, could drag on for weeks, some say months. The Biden team has already hired lawyers to prepare for such an eventuality. Back in the year 2000, when the outcome of the Gore/Bush election was questioned, markets waited in limbo for five weeks into December. In the meantime, the stock market declined 10 percent, until Al Gore reluctantly accepted defeat.
On the China front, the TikTok sale (or shutdown) has basically been booted to after the election, on Nov. 12, so I will ignore that. Downloads of WeChat, the main internet line of messaging and communication between Chinese people living, working, and studying in the U.S. and the Mainland, will be shut down on Sunday, according to the U.S. Commerce Department. That may elicit a counter response from the Chinese government or it may not — more uncertainty.
Investors, therefore, should be mentally and emotionally prepared. That doesn't mean the worse will happen, but it could. If you witness days, or even weeks of ups and downs, don't be surprised. It would not surprise me to see several pullbacks, only to regain those losses, before selling off once again. However, once we are through this thicket, markets should resume their uptrend.
@theMarket: Markets Reach for the Sky
Credit the Fed for this week's bump up in the averages. Technology shares led the charge as usual, shrugging off a sinking economy, higher unemployment and no progress on another bail out. What else is new?
At the annual Jackson Hole Symposium of world central bank leaders, conducted virtually this year, Jerome Powell, the chairman of our central bank, took center stage. In his prepared remarks, Powell announced a shift in the U.S. inflation policy. Rather than using the oft-stated, long-held inflation target of 2 percent, the Fed will now "seek to achieve inflation that averages 2 percent over time."
What's the big deal, you might ask? In laymen's terms, if inflation rises above 2 percent for some period of time, the Fed now will sit on its hands, instead of taking action preemptively to slow the economy and douse inflation.
Of course, he stated all the usual caveats about taking action if inflation were to run too hot, but reminded us that the Fed has not been able to get the inflation rate up to 2 percent in well over a decade. Inflation remained low, even when unemployment dropped to 50-year lows, he explained, instead of the opposite, which was what most experts expected.
The Fed believes that the markets are convinced that inflation won't ever get any higher than 2 percent because of past Fed policy. In which case, interest rates should stay low and maybe go lower still. That is the conundrum the Fed believes the markets and Fed policy find themselves.
A way out, they believe, is to be more flexible in targeting inflation in the future. If investors are no longer exactly sure how high the inflation rate might go. Before the Fed acts, it may break down some of the deflationary psychology that permeates the markets. Unfortunately, their policies thus far have resulted in what I call "bad" inflation. Asset prices such as gold, housing prices, and the stock market have seen huge price increases. But "good" inflation, as represented by wage growth, for example, has gone the other way.
One bit of good news was that the China/U.S. trade talks turned out to be a non-event. I guess the administration has bigger fish to fry at the moment. The RNC convention this week was a four-day affair. In addition, the White House attempted (but failed) to get the stimulus bail-out talks re-started between the two parties. In any event, the market believes that a sale of TikTok, the Chinese-owned company in the administration's cross hairs, will be sold shortly to any one of a number of American bidders.
In the meantime, I have not changed my view that over the next few weeks stocks should pull back. Investor sentiment, already in the danger zone, has risen even further last week. The fear index, called the VIX, bears watching as well. Over the last few days, while the stock market continued to climb, so did the VIX. Usually, the opposite occurs. It is just another sign that the frothiness of the market needs to be reined in for the time being.
I also expect the election campaign to begin in earnest after Labor Day. It usually ushers in a period of uncertainty through November, when the race is this close. Markets, as you know, do not like uncertainty. And judging by the tone of both party's conventions, I expect the level of vitriolic debate will stun us all.
@theMarket: Market's Window Getting Smaller
This week the benchmark S&P 500 Index made a minor new high for the year. While that is cause to celebrate, the question to ask is how much further can we climb in the face of a slowing economy before suffering a meaningful pullback?
Over the last few months, investors have been warned by just about every economist worth their salt that the country needs another jolt of federal stimulus. It has not happened. You can cast blame on whomever you want for that failure, but none of that matters to the over one million American workers who lost their jobs in the past week.
Even the Federal Reserve Bank, in releasing its July 28-29 Federal Open Market Committee meeting notes, expressed concern over the future of the economy. The members warned investors that the coronavirus would likely continue to stunt growth and potentially pose dangers to the financial system. They too have been urging the government to add more fiscal stimulus to the equation.
The longer it takes for Congress to respond to this urgent need, the smaller the window becomes for the market’s continued advance. Right now, most observers do not expect even a "skinny" stimulus deal to be passed before September at the earliest.
When thinking back to the financial crisis of over a decade ago, I recall it took a fairly substantial decline in the averages to convince the politicians to take action. Could that happen again? Unfortunately, some of the conditions for just such a response are present.
As I mentioned, investors have regained all their market losses and are now basically even for the year. At the same time, valuations are stretched, given the present recessionary state of the economy. Investors have paid scant attention to fundamentals during the pandemic. Companies have been given a pass even though they have been reporting horrendous sales and earnings results, but at some point, they may matter again.
It was more than interesting that the markets and gold sold off on Wednesday after the FOMC notes were released. Remember, the financier markets have been wholly dependent on the Fed to bail them out ever since the March bottom. Therefore, when the Fed publicly states that they are worried about the future, markets pay attention.
If we look at the most recent U.S. Advisors Sentiment for this week, we find that bullish sentiment (usually a contrary indicator) is at their highest level (59.2 percent) since mid-January of 2020. What's more, the spread between bulls and bears is at 42.7 percent. That number exceeds the spread in mid-January. Numbers like that are a warning sign to prepare for some kind of downdraft in the stock market. It may not occur this week, or next, but usually one can expect a sell-off within a month or so. And while these are different times and circumstances, I think readers would do well to pay attention to indicators like this.
By the way, my apologies for last week's column. I had expected a trade meeting between Chinese and U.S. officials last weekend, but it was postponed shortly after my column was published. Evidently, the meeting is now back on track, although no date has been set for the virtual review of the Phase One trade deal. However, if anything, the tension between the two parties have increased since then, so I will be paying close attention to the outcome of that meeting.
@theMarket: The Economy Versus the Stock Market
It is a tale of two markets. One represented by stocks, which has experienced a "V" shaped recovery, while the other (the economy) appears to be describing a "W." Can the two continue to diverge?
The short answer is "yes," as long as the Federal Reserve Bank continues to support the financial markets with unlimited stimulus. "Stocks are the only game in town," as one investor put it. "Bonds are yielding me less than nothing after inflation, and commodities are just too risky."
That sums up the present state of affairs facing investors.
The fact that earnings have been absolutely dismal in the latest quarter meant little to the markets. Earnings forecasts have been reduced to such a low point that the majority of companies have had no problem beating estimates. Some companies, especially in the technology space and stay-at-home stocks, have actually thrived during the pandemic.
I wish that could be said for the overall economy, but the coronavirus doesn't care what kind of economic models we fashion. Everyone hoped that by this summer the virus would have done its damage and moved on, but containing the virus has proven much harder than we imagined.
Despite the on-going virus burden, U.S. employers added 1.8 million jobs in July. That was an upside surprise. Average hourly earnings month-over-month were up 0.2 percent (versus -0.5 percent expected), which was good news as well. The service sector led the gains in the non-farm payroll report.
The only downside may be that the stronger than expected employment data may remove some of the urgency for an immediate compromise on a new stimulus package between the two parties. This week, investors had been hoping Congress would give the economy another jolt of stimulus, but so far nothing has materialized. Both Democrats and Republicans say they are getting close, but also add that they are still "trillions of dollars apart" from a compromise on a workable bill. Friday (today) was the self-imposed deadline for a deal, but after a marathon session on Thursday night, the politicians had nothing new to report. I do believe that in the end the two sides will hammer out a deal. It is just too important to the economy for our legislators to fail.
In the meantime, President Trump is trying to alleviate some of the suffering this stimulus delay may be causing Americans. He has said that he will try and implement executive orders for payroll tax cuts, assistance with both student loans and evictions, as well as unemployment benefits. An announcement may be forthcoming shortly on this subject.
As for the markets, we have reached a point where the S&P 500 Index is positive (up 2.3 percent) for the year. That is no mean accomplishment, given the ongoing burden of the pandemic. We have the Fed to thank for that, as well as the federal government's fiscal stimulus programs. As long as the central bank's monetary policy remains accommodative, we should be in good shape. But that does not mean that stocks can't go down.
One risk to the markets may be the on-going tech war between China and the United States. Readers should read yesterday's column, "Tensions with China may heat up," on the issue. President Trump escalated the pressure on Chinese companies by signing two new executive orders on Thursday. He has prohibited U.S. residents from doing business with the Chinese-owned TikTok and WeChat apps, beginning 45 days from now. On Friday, he added sanctions on Hong Kong leader Carrie Lam and 11 other individuals for implementing "Beijing's policies of suppression of freedom and democratic processes."
He worries that these Chinese companies are gathering personal information on Americans that may present a security risk. In addition, an influential group of U.S. regulators said stock exchanges should set new rules that could a trigger a delisting of Chinese companies. The president's Working Group on Financial Markets insisted that Chinese companies must be required to allow access to their audit work papers.
So far, we have been dealing with a "Teflon" market where bad news simply rolls off the averages and only good news is discounted. There is a risk that this tech war could escalate and test that concept. If I were you, I would expect China to retaliate against our actions fairly soon. If investors get spooked, it could cause a short-term decline in the markets.