The S&P moved higher last week, rallying hard on Friday---the ostensive reason being the better than expected nonfarm payrolls report on top of a very good week for economic releases. In light of the headlines, it would also seem that trade is fading as a Market concern. I don’t think that the pin action of a couple of days or a week necessarily means a lot in the grand scheme of things. But the S&P has been in a rising trend since April; and that is stronger sign that stock prices are going to continue to the upside.
The long bond smoked’em last week (other areas of the fixed income complex also did well) and is now on the verge of challenging the upper boundary of its short term uptrend. If it did that, there is some resistance five points higher; and if that is overcome, then it would be solidly above its moving averages and in uptrends across all timeframes. If not, then it would remained trapped between the upper boundary of its short term downtrend and the lower boundary of its long term uptrend. This pin action is certainly not indicative of a strong economy (the weak rise in wages contained in the nonfarm payroll numbers seems to have lessened investor fears about inflation), though it could be one of a safety trade.
The dollar showed some weakness last week, but on relatively poor volume. While negating its very short term uptrend, it remains well above its 100 and 200 day moving average and the lower boundary of its short term uptrend. This lousy price movement suggests that investors were ignoring it both as an indication of stronger economy or as concern over trade. A bit confusing for me. (again the poor wage stat seems to be the reason)
Gold continues its dismal performance, certainly not acting as a safety trade. (plus it should be rising if the dollar is weakening)
After a failed attempt at challenging the upper boundary of its short term trading range, the VIX has now dropped back below its 100 day moving average (now resistance), its 200 day moving average (now support; if it remains there through the close on Wednesday, it will revert to resistance) and now appears ready to make a run at the lower boundary of its short term trading range. That suggests that stocks (1) could be nearing a temporary high [if the VIX can’t push through that lower boundary] or (2) are about to challenge their all-time highs [if the VIX successfully challenges its short term trading range].
The dataflow over the last two weeks were in sharp contrast. The week of 6/25, the numbers were abysmal while last week they were equally positive. Score: in the last 143 weeks, forty-nine were positive, sixty-seven negative and twenty-seven neutral.
Overall the stats continue to point to an economy that is growing but not at a pace much better than that of the last couple of years. To be sure, the second quarter growth will be higher than the first; but there is not enough consistency in the data to suggest that economic growth is about to shift to some permanently higher plane. On the other hand, last week’s plethora of upbeat numbers apparently got investors anticipating a great second quarter earnings report season---which is now upon us. (Note: the earnings reports discussed in the article below are those that companies report to the public, not what they report for tax purposes which is the numbers I use in discussing corporate profits)
That said, the noises out of the Fed seem to be that it is buying the accelerating growth thesis and remains on track towards higher interest rates and unwinding its balance sheet---about which the Market appears unconcerned.
Meanwhile, Trump continues to do what he does best, which is rattle everybody’s cages. As you know, I have been positive on the economic impact of his efforts towards deregulation and downsizing of the government---and, as a result, I upped my forecast for the US’s long term secular economic growth rate. In addition, I am hopeful that a new international trading regime will emerge that is fairer to the US. That also should have a beneficial influence on our growth rate. But ‘should’ is the operative word; and until there is some clarity on this issue that remains just a hope.
On the other hand, our current fiscal policy is, in my opinion, a huge negative. When an economy is growing, the government should be shrinking its deficit so that it has firepower when the economy needs stimulating. We are doing the opposite---running ever higher deficits when the economy appears to have reached full capacity (remember, full capacity in 2018 is not at the same level as in the past). That huge debt (1) restricts our ability to grow because it demands so much of our resources just to service the debt [versus investment and higher wages], (2) will become an even greater burden if interest rates go anywhere near the historical mean, and (3) as I suggested above, will hinder the government’s ability to soften the effects of the next economic downturn.
Bottom line: investors seem to have regained their happy feet based on the assumptions of a new improved secular economic growth rate, a satisfactory outcome to the trade talks and a Fed that will not spoil the party. And they may be correct. My problem is that is all reflected in current prices. So why do I want to bet money when all the good news is priced in? In fact, I might want to be a bit prudent and take some money off the table. Sooner or later, the bears come home and Goldilocks has to beat feet.
Here is a great counter argument to my concerns about corporate spending and the level of overall debt in the US (medium):
News on Stocks in Our Portfolios
This Week’s Data
The big four economic indicators.
What I am reading today
NATO is obsolete (medium):
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