@theMarket: Tariffs Trash Stocks
Volatility in the form of U.S. trade tariffs levied on China cut through investors' complacency with a vengeance this week. It took less than three days to drop the markets by 3 percent. Is it over or do we have another 5 percent or so to endure?
My bet is that it is over — for now. Sometime during the on-going trade negotiations occurring in Washington today and tomorrow, the thorny trade issues, (such as intellectual property (IP) protection for U.S. companies) will be kicked down the road. A compromise on other, easier issues will be announced as "on-going" (although not inked) and the Chinese delegation will fly home in an atmosphere of reconciliation.
From the president's perspective, China, after agreeing to a list of breakthroughs in the trade negotiations in Beijing two weeks ago, "broke the deal." Over a half-dozen important "firsts" involving IP rights, as well as other structural rules and regulations that have hampered U.S. companies doing business in China, were first agreed to as of two weeks ago. A week later, half of them had been deleted from the formal draft agreement sent to Treasury Secretary Steven Mnuchin and Chief Trade Negotiator Robert Lighthizer.
The move surprised the negotiators and infuriated the president. Sunday night, the president took to Twitter and threatened to raise U.S. tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. The tariffs took effect Friday morning. The Chinese have responded by preparing their own additional tariffs on U.S. goods.
As you might imagine, the Dow dropped 500 points or more on Monday, spiking higher on Tuesday, down again Thursday, and by Friday no one (including the Algos and their computers) was sure what to do next so the averages spent the day moving up and down just because. The volatility index, which is a measure of fear and loathing in the stock market, exploded higher, putting even more pressure on world markets.
The Chinese market, as well as other emerging market indices, cratered. One of China's main indices, the Shenzhen Index, dropped over 7 percent in one day. As the markets fell, the financial media trotted out all the "what if" scenarios they could cram into their studios between commercials. Hopefully, you turned it all off.
Why, therefore, am I not more concerned? Well, for one thing, all this brouhaha has only pushed markets down by 2-3 percent. In the grand scheme of things, that's simply one of three or four normal pullbacks you should expect each year in the stock market. And, on average, you can expect at least one 10 percent correction per year. You should remember that.
Granted, if things escalate from here on the trade front, we could see another 5 percent downdraft or so. But it still wouldn't be the end of the world, given the gains we have enjoyed so far this year. You might argue that I am too complacent, given the impact that higher tariffs could have on U.S. economic growth, let alone global growth.
If economic activity did decline, I would fully expect the Fed to come to the rescue, cutting interest rates in order to support the economy, while goosing the stock market once again. In fact, one could theorize that the president is thinking along these same lines when he said on Friday that "there was no hurry" in lifting these new tariffs.
I have been warning readers for weeks that all signs pointed to a market pullback. All that has happened is that we are now in one. In the short-term anything could happen. We could bounce from here, get back to the old highs and fail. Things might also quiet down on the trade front for a week or two, while investors' focus may switch to what's happening in Iran or North Korea. Those areas could also cause markets to fluctuate. Take it in stride.
My advice is to look beyond these events and keep focused on the fact that there is still a whole lot of good news supporting the markets just under the surface.
@theMarket: New Highs Beget New Highs
Some people believe we are in a "melt-up." It is where the simple weight of money pouring into the U.S. stock market continues to carry stocks ever higher. Whether that qualifies as an investment thesis, or simply a lame excuse to justify record highs, it matters little to the bulls.
It is true that this past week, we actually witnessed a rare event — a two-day, 50-point drop in the S&P 500 Index — before stocks recovered. But good news on Friday morning (job gains in the economy came in at 236,000) cheered investors. It was largely a goldilocks report where wage gains (considered inflationary) were flat for the month, bringing the the average hourly earnings rate up to 3.2 percent year-over-year.
Overall, the official U.S. unemployment rate is now 3.6 percent, which is the lowest level since 1969. It brings the total number of monthly job gains to 103 in a row, which has never happened before. Given that it is also the best start in the year for stocks since 1987, is there any wonder that exuberance is the prevailing mood on Wall Street (and in the White House)?
Even the bears, whose numbers are expanding by the way, admit that if we did suffer a correction, it would be, at most, shallow and sharp. That's the kind of correction you want, if and when it occurs. I have been reporting faithfully each week the bullish rise in investor sentiment and, although it remains flattish at 55.7 percent bulls, it is still quite high.
Earnings season, which is 80 percent complete, turned out to be better than expected in the minds of most investors. And although the Fed did not cut interest rates this week at their FOMC meeting, I have to wonder if anyone really expected that to occur?
As we move into spring, it appears that the wall of worry we have been climbing is crumbling. We should finally receive a verdict on the U.S./China trade agreement as soon as next week, according to administration officials. Talks in China last week went well, and the Chinese delegation will be back in Washington this coming week to hammer out more details.
Some argue that a successful conclusion to this issue, which has been over-hanging the markets for almost two years, is largely discounted. Could we get a "sell on the news" reaction if a deal is announced?
We could, but I think it would depend on the level of the markets at the time. If, for example, the S&P 500 Index were to be trading above 3,000 or so, (another 70 points higher from here), then yes, it could be an excuse for some profit-taking.
And while everything seems rosy for the economy overall, we don't want it to get too much stronger in the short term. Remember, the Fed is data dependent. If, for example, the central bank did cut rates by a percentage point, as the president asks, in order to goose the economy, you can bet the next move by the Fed would be to reverse that and hike rates.
I believe the Fed's about face in interest rate policy last December is the real reason the market is where it is. If investors believed that the Fed's easy money policy might change, the markets would plummet. The Chinese economy might also be a factor.
In case you haven't realized this yet, China, as the world's second largest economy, has a substantial impact on overall global growth, including growth and inflation within the United States. Recently Chinese authorities have relied on fiscal spending to support their slowing economy, which has been hurt by the tariff issues.
A trade deal would be as good for China as it would be for the U.S. It could boost growth in both economies. But what's good for economies is not always good for stock markets. Rapid growth, on top of moderate growth, might ignite inflation.
In the past, Chinese demand for raw materials to fuel their growing economy has sparked inflation globally. If that were to happen again, it could force the Fed to reverse policy, raise rates, and cause a repeat of last year's sell-off. While this scenario is only one among several possibilities, it is something to keep in mind, given that we are within a week or two of a potential compromise solution in the trade talks.
@theMarket: Investors Reach for New Highs
The stock market won't quit. It has been on a tear since the day after Christmas. It feels like it wants to keep climbing. That would be a fairly simple feat at this point, since we are only a percent or so away from regaining those historical highs. What will happen once we get there.?
You may ask why am I so confident that the markets won't just give up the ghost right here, right now? A look under the hood at the underlying sectors that make up the market indices gives me a clue. Let's take the semiconductor sector. Throughout the last year or more, semiconductors, a sub-segment of the technology area of the market, have led stocks higher (and lower) time and time again.
Semiconductors made a new all-time high this week. That usually precedes a similar move in the major indices. In the case of the NASDAQ, we are within spitting distance of the old highs.
Other sectors, such as the Transportation Index — trains, planes, railroads, etc. — is nowhere near their historical highs, but that's not unusual. Another positive indicator is that just about all sectors are participating in this rally. The same is true overseas, where even the weak sister of the world, the Eurozone, is witnessing good gains within the European stock markets.
Over the last month, as readers are aware, I have repeatedly cautioned that somewhere out there lurks an expected pullback. Remember, we should expect 2-3 such pullbacks in the stock market each year at a minimum. It is the price of doing business in the stock market. A decline of as much as 9-10 percent would not be surprising, although I expect the next drop won't be of that magnitude.
In any case, as the markets climb, more and more equity experts that I respect are calling for a time out for the markets. Ned Davis, for example, runs a global research shop that is highly respected. He has a good number of years under his belt calling the twists and turns of the market. In his April research report he recommended that, "we would hold off adding equity allocation until a correction has taken place."
Davis worries that global fundamentals are deteriorating. "We will need to see evidence of improving fundamentals" before getting bullish again. Ned also points out that there has been a dangerous rise in complacency. The Ned Davis global sentiment indicators are registering the highest levels of optimism on record, dating back to 2002.
The US Advisory Sentiment Indicator, while not as high as the Ned Davis Index, still registered its highest reading in nine straight weeks of gains. It now stands at 54.8 percent, just shy of 55 percent, which indicates an elevated level of risk for the stock market.
Remember, however, that the investor sentiment contrary indicator is not the final say in whether the markets continue their run. We are now in the midst of the first quarter earnings season. So far, many of the company reports are coming in better than expected. As a result, despite the cautionary technical signals popping up in the markets, earnings and revenue "beats" are providing support for the bulls, at least for now.
My advice is to just stay the course, since timing a pullback and getting back in would be just too tricky in this market. You would have more luck in Las Vegas, if you want to gamble.
@theMarket: Earnings Season Cause Markets to Surge
After a week of low volume consolidation, all three averages broke higher on Friday. The bulls are still in charge and seem determined to push stocks back to their all-time highs.
A trigger could be this year's first quarter earnings season, which is upon us, some of the multi-center banks reported today. They did not disappoint, beating estimates handily and expectations are that most of the big banks will also beat earnings estimates. That won't be too difficult to do given that earnings estimates have been down-graded not once, but twice, over the last three months.
Overall, the Street is expecting companies that comprise the S&P 500 Index to report a decline in earnings this quarter (anywhere between 2.5 to 4 percent). As such, it won't take much financial engineering for companies to beat these low-ball estimates. With that same index less than 1 percent from its all-time highs, I would expect that next week we should see that level at least touched, if not broken on the upside.
Be advised that the S&P 500 Index has been up 10 out of the last 11 days. That is an unusual performance, but it doesn't mean that string of gains needs to be broken any time soon. On the contrary, stocks could climb and climb until the last buyer has committed to the market before falling. It usually happens that way when the bull becomes a thundering herd.
But it is not earnings that are propelling the markets higher, it is the Fed's easy-money policy stance. As long as that program remains, stock prices will be supported both here and abroad. Overseas, just about every central bank is singing off the same song sheet by lowering interest rates and dumping more money into their financial markets in an effort to prop up their slowing economies as best they can.
Here at home, President Trump has taken to the airways once again, demanding our own central bank cut interest rates, while providing more stimulus to the economy and financial markets. I don't underestimate his power to bend the central bankers to his will. Trump has forced a new political era in this country where the rules and regulations of the past seem to be falling by the wayside on a daily basis.
I couldn't help but notice last week, the April 8th piece in Barron's, a well-regaraded business and investment newspaper. "Is the bull unstoppable?" the editorial team asked, in a huge front-page headline. They went on to write "And just the fact that we're asking the question — on the cover of Barron's, no less — could be a contrarian indicator signaling that the market has truly topped."
They recognize that many times in the past, when a major media publication splashes a story like that on their cover page, a correction, or even a bear market, develops within a short period of time. If you couple this article with yet another increase in bullish sentiment of the Investors Intelligence Advisors Sentiment poll, which came in at 53.9 percent (the highest reading since last October and another contrarian indicator), readers should not be surprised if sometime soon we see a 4-5 percent hit to the averages.
So what? All it would mean for the markets is a much-needed correction before making even higher highs in the months to come. Of course, that forecast is largely dependent upon a trade deal with China by May. The negotiations, according to the White House, are progressing favorably.
The president, however, is still hedging his bets. The word "if" continues to come up whenever Trump is asked about the progress in the U.S./China trade deal. Is that simply a negotiating ploy, or is he truly worried about successfully concluding a deal?
Another potential positive for the markets and the economy might surface if the president can make a deal with the Democrats in furthering a U.S. infrastructure initiative. Speaker Nancy Pelosi will be meeting soon with the president on the subject. It is one of the few areas that both parties can legitimately find common ground. Whether they can get beyond the concept stage, however, remains to be seen. In the meantime, stay invested.
@theMarket: Markets on a Tear
As fearful as investors were back in December, the greedier they have become in April. Investor sentiment is climbing, interest rates are falling, and the Fed is on hold. All we need to push the markets even higher is a trade deal with China. It's coming.
The S&P 500 Index has tacked on a hundred points in nine days. The all-time record highs for that index is at 1,940 less than 50 points away. That index has been up seven days in a row. The Dow up 6 out of 7. Last week's worry, the inverted yield curve, which occupied everyone's attention, is a barely remembered footnote in buyers rush to own stocks.
Of course, there are warning signs sprouting up throughout the markets. The Algos and computer-driven "Bots" are pushing the indexes beyond their limits. Plenty of strategists are warning that the markets have come too far, too soon. They are probably right, but they were probably right one hundred points ago.
If we all know this, then why not get out while the getting is good? The simple answer is no one knows where to get back in. You might say "I will wait until equities become low enough to offer fair value." The problem is that no one knows what that means anymore.
We live in an environment where markets are pushed to extremes without much, if any, fundamental reason. Markets go higher "just because." And if that is the case, there is no telling when the flipside of these gains will occur. Every day there is a 50/50 chance that stocks will continue higher, but the same probability that they will go lower.
Plenty of people have called me who are now worried about how high the market's have climbed. They have made 18% or so in a short time and don't want to lose it. But in their next breath, they caution me against selling any of their funds "until the market looks like it is going to pull back."
If the truth be told, every day of the last two weeks, around lunchtime, the markets looked like that. But instead, during the last hour of trading, stocks recovered losses and moved even higher. Honestly, folks, if you are still operating within that mindset, you need to change your thinking. Please understand that the markets no longer conform to behavior patterns that may have worked for you a decade or more ago.
The bears will tell you that with the economy slowing, the yield curve inverting (last week's argument), and the likelihood that earnings will probably be negative in this year's first quarter, that the risk of a market decline is quite high. I do not dispute that.
However, with a Chinese/U.S. trade deal possibly just around the corner (2-4 weeks away), do you really want to miss out on the market's potential to celebrate? Then there is the president's new message to the Federal Reserve Bank that it needs to start another round of quantitative stimulus. Who knows whether the Fed will cave-in again and do the president's bidding?
As you know, I have been monitoring investor sentiment as an important contrary indicator for the markets. Wherever I look, that bullish (greed) sentiment is rising to levels which reflect extreme optimism. That's almost always a signal that we are in for a pullback. The question is when.?
John Maynard Keynes once said that "markets can remain irrational far longer than you can stay solvent." My advice: don't try to game this market, stay invested, and if a decline occurs, take your lumps because stocks will most likely recover and continue upward.