The Morning Call
7/9/18
The
Market
Technical
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].
Fundamental
Headlines
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
Economics
This Week’s Data
US
International
Other
The
big four economic indicators.
What
I am reading today
NATO is obsolete
(medium):
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