@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.
@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!
@theMarket: Ignore the Noise and Profit
The world is in turmoil. The news is all bad. Trump is threatening to up the ante on tariffs. NAFTA is kaput. Our trade partners hate us. China won't back down and, if you have time to spare, you are reading about immigrant kids locked in Texas dog cages by order of the president. So why is the stock market holding up?
The fundamental reason remains the same. Under all the muck, there is and will continue to be a bid under the stock market. In past columns, I have explained why — corporate stock buybacks, M&A, higher dividends coupled with a strong economy and low-interest rates.
If you look at the technicals, which I do, every sell-off seems to stop at a technical support level. In addition, while the Dow Jones "Industrial" Average put together eight down days in a row (it hasn't done that for over 15 months), small-cap stocks were hitting record highs.
Why the divergence? Most of the Dow is made up of big industrial companies with a high exposure to overseas markets. Tariffs mean less business; less business means lower stock prices. Small-cap stocks, on the other hand, are U.S.-centric. They rarely export and most of their fortunes are tied to the U.S. market. Ever since the trade wars began in earnest, small caps have soared.
Over in the technology space, the same thing is occurring. While commodity stocks are getting crushed (tariffs are bad for trade), large-cap technology and biotech are soaring. That's largely because the world can't do without the products those sectors offer.
The point is that traders are having a field day, shorting the markets on every tweet, and buying them back when the indexes hit a certain support level. Selling material stocks and buying tech, then doing the opposite when the circumstances change. And this will continue. My advice is to just ignore the noise and take a long-term view.
This week it was another missive from our Tweeter-in-Chief that sent investors into a tizzy. Trump threatened to levy 10 percent tariffs on another $200 billion of Chinese goods, if China retaliated on the president's first round of trade tariffs. China seemed unfazed by the tactic. So far, this week has been a war of words not actions.
Investors should not underestimate the Chinese response, nor assume that it will be confined to tariffs. Kim Jong Un made yet another trip to Beijing this week without fanfare or announcements. Trump assumed that after his historic meeting with the North Korean dictator, he removed that bargaining chip off the trade table. China could be putting it right back in its hands.
U.S. Treasury bonds could be another chip on the table. China holds a lot of them, as do other countries. Over the last two months, foreigners have sold about $5 billion/month of our debt. Analysts believe that selling our bonds would hurt the Chinese as much as it would hurt us. That's true, but in this trade war, both sides seem willing to suffer to achieve their ends.
Clearly, for the U.S., reducing both exports and imports would wipe out most of the impact of the tax cut. Since the economy is enjoying a faster growth rate this year, (almost 3 percent in the next quarter or two), we could probably absorb some of those negative impacts. The same thing could be said for the losses we would suffer in jobs.
Given that the economy is hovering at a historic level of unemployment and may drop even further to under 3.8 percent, it would be an ideal time to be hit with some job losses. Throwing a million or two Americans out of work, as a result of trade wars wouldn't be the end of the world from an economic point of view. Of course, you or I might feel quite differently if it was our job that was on the line. Nonetheless, in this world where even the most obvious of truths can be blamed on others (and believed by many Americans), why not bet the farm since it's not yours anyway?
@theMarket: Trump's $50 Billion in Chinese Tariffs Trashes Markets
Investors waited all week for President Trump's verdict. On Friday, he did not disappoint his followers. He decided to move ahead with plans to slap $34 billion in tariffs on Chinese imports. Stock markets worldwide fell on the news as investors await a Chinese response.
And China will respond. Chinese trade officials have already outlined their planned retaliation. China will match Trump's 25 percent tariff on 818 products by doing the same on 106 American goods worth about $50 billion.
We can expect an accelerating war of tit-for-tat tariffs in the weeks ahead. For example, the United States Trade Representative plans to add an additional 284 Chinese imports to their list (amounting to another $16 billion) by July 6. You can bet China will respond in kind.
Some on Wall Street still hold out hope that these tariff threats could still be averted. Although these tariffs could be implemented as early as next week, they could also be delayed if negotiations between the two nations continue. The White House could conceivably wait a minimum of 30 days or as much as 180 days if they chose to do so.
There are several other issues that can come into play on the trade front. European nations this week released a list of counter tariffs they plan to implement in response to Trump's 25 percent tariffs on their steel and aluminum exports. In addition, both Mexico and Canada have already released tariffs on U.S. imports of their own. We could see a virtual avalanche of global tariffs that could bury investors up to their necks.
While many businessmen and corporations are horrified at the administration's actions, others think it is the best thing that could have possibly happened. Clearly, the weight of historical evidence indicates that everyone loses in a trade war. If opposing forces respond in kind to another nation's tariff increases (as they are now), the result would logically be a reduction in global trade, which, if it continued, could result in a second Great Depression.
Yet, after decades of getting the short end of the stick in trade deals, as the president claims, how else do we, as a nation, change the status quo? Are there other, less dramatic, methods of accomplishing our national objectives? Of course there are, but those methods would require months, if not years, of negotiations by trade experts. However, that is not the hand we have been dealt.
None of the administration's top men have that kind of expertise. Nor would it matter if they did, because Donald Trump does not have the patience, disposition, or knowledge to pull that off. No, in Trump's case, it will always be "his way or the highway." Get used to it.
As for the markets, it is interesting to note that the stock markets are no longer declining as they did in February and March at every tweet on trade. It appears market participants, while still responding to short-term headlines, are keeping their eyes on the longer-term prospects of a stronger economy and better earnings. While we remain in a trading range, this one seems to have an upward tilt. Higher highs and higher lows continue to support stocks.
In the coming weeks, we could see even more volatility as nations rattle their sabers on trade, but depending on where you live or where you work, not all is gloom and doom on this front. If you are a soybean farmer, a worker that depends on low-cost steel and aluminum to keep his job, or possibly an auto worker (if tariffs on autos is next on Trump's tariff list), then tough times could be just ahead for you and your family.
But a banker in North Carolina, a small business owner in energy-rich Texas, or a tax-conscious, elderly millionaire that wants to make as much as he can before passing on his wealth to his beneficiaries are more likely to approve of Trump's tariff strategy.
In a polarized country where "getting and keeping your own" supersedes the common good, a trade war that hurts others can be easily rationalized away. As long as it remains "the other guy's problem," and not yours, what's not to like? Commerce Secretary and billionaire Wilbur Ross warned that Americans would feel some pain in the months ahead because of trade issues. We will, but you can bet that Wilbur sure won't be feeling it.
@theMarket: Another Week of Market Volatility
As the month wound down, so did stocks. Pronouncements from Washington dominated the market's direction on a daily basis. We can expect to see that trend continue as the summer doldrums reduce liquidity and exaggerate market swings.
The adage of "sell in May," however, did not fulfill the bears' expectations this year.
Actually, the month of May has been pretty good for stocks recently. The S&P 500 Benchmark Index gained a smidge over two percent for the month this year. That's not to say those gains were easy. The stress level for those who are trying to trade this market is through the roof.
And that's because two opposing trends are impacting the financial markets. The first is short-term volatility caused by political events. At the moment, these are mostly trade-related: tariffs and counter-tariffs, NAFTA concerns, and China trade. All of the above have generated a war of words (or tweets) and, depending on someone's mood in the morning, can spark 1-2 percent movements in the index in either direction. The falsehoods, about-turns, and misinformation have day traders going crazy.
And don't forget the international events. This week, Italy dominated trade, as a political/financial crisis may be brewing in Europe's fourth-largest economy. A new prime minister, Guiseppe Conte, was appointed Friday as an uneasy coalition of populists and right-wingers agreed to compromise in the wake of a severe financial downturn in Italian financial markets this week.
We will wait for future developments (see my column published yesterday on the subject) before giving the green light to Italy and Europe. At the same time, the Trump/Kim show continues. The off again, on-again charade is accomplishing what both egomaniacs want most: more time in the limelight.
Then there is the longer-term trend, which centers on real fundamentals: unemployment, inflation, interest rates, global growth and the like. All of these indicators are still flashing positive for the stock market. As readers know, I have been urging investors to focus on that trend and ignore the noise caused by all the short-term, headline-grabbing events.
Take today's much-heralded employment report. The U.S. unemployment rate has just hit an 18-month low at 3.8 percent. We haven't had a lower rate since the year 2000. Wage growth came in at 2.7 percent compared to a year ago. That is a stellar performance, no two ways about it.
This report, however, was marred by controversy. Prior to its release, Donald Trump tweeted a "heads-up" that he was "looking forward to seeing the employment numbers at 8:30 this morning" — obviously a tip that the numbers would be good. Federal rules (as Trump knows but ignored) state that no one in the executive branch can comment on major economic reports until an hour after they are released. Since few individuals (but almost all institutions) trade in the hours before and after the markets open, Trump's comments enabled bond, currency, and stock market futures traders at big institutions to profit from this information.
At the end of the day, what matters is the economic trends, and right now the trends are your friends. Until the data say otherwise, investors should remain invested, ignore the short-term volatility traps and enjoy the summer.