@theMarket: Markets Gain on Hope & a Prayer
Investors remain cautiously optimistic that the wall of worry that has been plaguing us for months may now be crumbling. That's no sure thing, but at least we did have some good news this week.
While most investors were not expecting a repeat of last month's partial government shut-down, it was still a relief to see that issue put to bed on Friday. The president reluctantly signed the budget bill that Congress passed over his objections.
Granted, the president did not get his wall, although now he is threatening to get the funding by declaring a national emergency on our southern border. Whether there is or is not such an emergency, by declaring one, he bypasses Congress. That will establish a dangerous precedent for future presidents who may be frustrated with the constitution's checks and balances among the three bodies of government.
Another president could use that same tactic to circumvent Congress in order to secure his or her own objectives. Nancy Pelosi, the Democrat speaker of the House, has already indicated that, for example, that same tactic could be used in the future to restrict or even outlaw guns in this country. It could be used to balance the budget, or set term limits in Congress, or any number of things that a frustrated president might wish for.
But enough politics. As I have written many times in the past few months, the markets remain China-dependent. Earlier in the week, markets swooned when reports surfaced that some of the structural issues within the Chinese economy that we want changed have become a sticking point in negotiations. A few days later, the president said he "may consider" postponing the March 1 deadline, if there was progress on the trade talks.
Almost every other day, some administration official or another makes a positive (or negative) comment that sets the markets in a tizzy. Words such as "reluctant" or "constructive" can send the Dow up or down 200 points in the blink of an eye. From my point of view, it's all-day trading and won't impact the longer-term outcome of the markets.
I have been predicting from the outset of Trump's trade war, that there will be a resolution and a compromise on these issues between the U.S. and China. No, it won't be on the market's time table or terms. I believe it will be a series of incremental agreements on one or two issues at a time.
It also happens that it is a fortuitous period of time for the United States to address these decades-old issues. Not only is the Chinese economy faltering on several fronts, but China is also in the midst of a multi-year program of becoming a consumer-driven, rather than an export-driven, economy. As such, reducing exports and increasing imports dovetails with their own economic objectives through 2025. However, altering trade deficits and surpluses is the relatively easy part of the trade discussions.
The intellectual property debate is something that will require a substantial change within China and can't be done with a brush of the pen (or keyboard). Clearly, one of China's major objectives is to become the world's leader in technology advancements. If that means stealing our secrets in any way they can, then they will do it. Not only is this a clear and present danger to our own economy, but also has enormous ramifications for our military and national defense.
Next week, the trade talks move back to Washington. As such, we can expect a series of "leaks" as the days go by, which should guarantee more volatility on a daily basis. As for the supposedly "important" stuff like earnings, economic growth, employment, etc., all of it remains relegated to second or third place as the talks progress.
As the markets climb, there are more and more calls by strategists for another one of those 6-7 percent pull-backs (that could easily turn into a 14-15 percent decline on the back of all this computer trading). I have an interesting notion. What if the news is really good on the China front and, after a brief spike up, markets use the occasion to "sell on the news"? That would be the most inconvenient thing that could occur to the greatest number of people. That's what the markets usually do.
@theMarket: Markets Are China Dependent
Profit-taking is a natural and expected part of the stock market. That's why no one should be surprised that this week we are witnessing a period of consolidation. It is actually a good thing.
Given that most investors need a reason to explain any market declines, this week's announcement that President Trump is postponing his meeting with Xi, his Chinese counterpart, was both a surprise and a disappointment. It shouldn't be.
Over the last few months, I have tried to reduce investors' expectations of an easy, one-shot, Chinese break-through on the trade front. The postponement is actually a positive, in the sense that both sides are taking the negotiations seriously. There is just too much to negotiate, which is why I expect that the March 1 deadline to institute additional tariffs will again be postponed.
Part of the problem is the president's insistence that he be the one to make most, if not all, of the decisions on the China front. That is difficult to do when his attention has been focused on getting his Wall money, fending off investigation after investigation, shutting down the government (or not), and feuding with Nancy Pelosi and Chuck Schumer.
There just isn't enough time in the day. To accomplish all of the above and move forward to solve an array of issues that have evolved over decades of trade with the world's second-largest economy is asking the impossible. I have to hand it to Trump for even attempting to renegotiate our long-standing China trade issues. No other president before him has tried.
As such, investors should take a more realistic view of what can and cannot be done between now and March. But try telling that to the machines that drive most of the daily trading. All they need is the word "postponement" and the selling begins.
Last week readers might recall that I expected this pullback.
"We have seen some good gains, however. So, I would expect to see a period of consolidation in the weeks ahead. Any dips in the market would be an opportunity to buy, not sell."
My target was 2,715 on the S&P 500 Index. We hit that level and a bit beyond before profit-taking began on Wednesday. Regardless of the reason, stocks were over-bought, in need of consolidation, and the China news provided the excuse.
I said last week that if you had sold out of the markets during the downdraft we experienced in the last quarter of 2018, you now have an opportunity to get back in the market. I am sure you will be wondering at what level. Short-term timing advice is purely a guesstimate. From a technical point of view, the S&P 500 Index could drop another 50 points easily from here to 2,646.
It could go lower, but I wouldn't worry about it. You see, all it would take is an encouraging tweet by the president to trigger a buying frenzy among the machines. Investors, please ignore the day-to-day noise. The economy, earnings and employment are still growing. The Fed is no longer tightening and that's all you need to know.
@theMarket: The Fed Finds Religion
After two years of tightening monetary policy, the U.S. Federal Reserve Bank signaled this week that it was time to put their monetary tightening program on hold. The stock market soared in celebration.
As we closed out the month of January, stocks are gaining. The October-December declines that culminating in the "Christmas Eve Massacre," which were the worst in 80 years, are rapidly disappearing. Investors who were smart enough to hold fast should be made whole again by the end of this quarter, if not before.
That does not mean that the volatility that has beset the markets of late will fade away. Quite the contrary, I expect the wild swings in the stock market to continue. But for now, the Fed has once again provided a floor of support for equities. The question to ask is:
"Was the Fed's move justified, or did the markets (and Donald Trump) scare Chairman Jerome Powell and his committee into backing off?"
I would say there is a little of both in the Fed's actions. While the economy is still growing, "the case for raising rates has weakened somewhat," according to Powell, who spoke after the FOMC meeting on Wednesday. Of course, he reminded his audience that the Fed would still be "data dependent" in deciding when the next interest rate hike might occur.
That was a sea change in rhetoric from last quarter when the Fed chief said rate increases and sales of $50 billion a month U.S. Treasury bonds were largely on autopilot. President Trump threw a fit, making his own dissent from that policy quite clear. He believed that the Fed's actions were causing the economy to slow. He lashed out at the man he hired last year to lead the Fed and threatened to have him fired.
Whether it was his words or the fact that the markets threw a hissy fit, plummeting almost 20 percent in a matter of weeks, is debatable. Whatever the reason, the Fed did a 180 and has returned to the easy money religion that has galvanized the stock market since the financial crisis of over a decade ago.
Some of the key variables that the Fed studies in order determine monetary policy are wage growth, inflation, GDP, and unemployment (among others). None of them are flashing warning signs yet. Yes, economic growth is moderating but is still growing. Yes, we are seeing some wage growth, but it is not out of hand by any means.
Friday's employment report indicated wage growth is moderating, although jobs are still gaining. Nonfarm payrolls surged to 304,000 jobs versus estimates of 170,000. Evidently, the government shutdown didn't have that much impact on the data, although the official unemployment rate did tick up to 4 percent, which is where it was back in June of last year.
Granted, corporate earnings are slowing, but if this quarter's earnings season is any indication, many companies are still seeing good gains from the economy. So maybe, just maybe, all those Doom Sayers predicting an imminent recession are wrong. It seems to me that we are in an economic sweet spot that will support stock prices through the remainder of the winter.
Last week, I predicted the S&P 500 Index would touch 2,715. We hit 2,716 on Friday. That brought the gains for the three averages for the month of January to 8 percent for the Dow, 9.5 percent for the S&P 500 Index, and 12 percent for the NASDAQ. That was the best stock market performance in thirty years. For those of you who followed my advice and held on to your positions through the last quarter of 2018, you have now recovered the lion's share of your losses.
We have seen some good gains, however. So, I would expect to see a period of consolidation in the weeks ahead. Any dips in the market would be an opportunity to buy not sell. For those of you who sold last quarter, I am sorry, but you will probably get a chance to buy back in the months ahead.
@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.