@theMarket: Stocks on Hold
February delivered good gains for the markets. All the main averages were up, continuing January's climb toward the old highs. This week, momentum stalled a bit, indicating that investors need more good news to continue buying.
A China trade agreement (or lack thereof) still takes center stage. Despite the Washington, D.C., circus surrounding the testimony of Michael Cohen, the president's chief "fixer" for over a decade, traders largely ignored the hype.
At the same time (no accident in the scheduling), President Donald Trump hoped to take the spotlight off Cohen and back on him by meeting with Kim Jung-un in Hanoi for a second summit. Unfortunately, that meeting was such a bust that Trump left early without any progress at all. One wonders if the whole trip was just a publicity stunt to draw attention away from the Cohen testimony before Congress. Traders ignored that event as well.
What really kept the lid on the market was U.S. Trade representative John Lighthizer's comments before the House Ways and Means Committee on Wednesday. "Let me be clear," Lighthizer said, "Much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached."
The trade rep went on to say that China needed to do more than just buy more of our trade goods, citing all the other concerns such as technology transfers and intellectual property theft.
None of the above should be new to my readers, since it is something I have been talking about for months. However, this dose of reality flies in the face of all the hype and hope that propelled the market averages to where they are today. And it has not been only our market that was bid up by the tweets and off-hand comments of the president in the last few weeks.
China saw its equity market gain 5 percent overnight earlier in the week, after gaining almost as much last week. Since then, the Shanghai averages have come back down to earth. They have given up a good amount of those gains. Here in the U.S., the averages are still hanging in there and finished the week up modestly.
Almost like clockwork, Larry Kudlow, the president's chief economic advisor, tried to talk the markets and the trade-deal prospects back up on Thursday morning. He has done this good cop/bad cop routine before and after comments by Lighthizer. After an initial flurry of algo-driven buys, the rally petered out. However, on Friday, after investors digested a better than expected 2018 fourth quarter GDP number of 2.6 percent, the markets were encouraged and finished up for the week.
But it remains the job of the maestro to reassure the markets if we hope to break out of this tight trading range on the S&P 500 Index. At this point, Trump and Trump alone can dispense the hope and Beetle Juice necessary to keep the markets climbing. It is no secret that the averages are overbought, extended, and due for a pullback of sorts. The "pain trade" this week was to short the markets anticipating that decline, which did not occur. As we enter a new month, there is an even chance that, instead of a decline, we continue this sideways action or, (if there is a breakthrough on trade), the potential to move even higher.
@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.