Into the basement

Into the basement.  Sellers pushed stocks into the cellar on Friday as fear over trade and the yield curve loomed over the markets.  Friday morning’s economic releases painted a positive picture of job growth (although newly added non-farm payrolls were slightly less than expected) with the unemployment rate remaining at 3.7% (still at record lows since the 60’s) and modest wage growth.  Oh yeah and consumer confidence is still high at 97.5.  So what was it specifically that caused such indigestion in the stock markets?  Too many unknowns remain.  Specifically, trade and the Fed, but if you take a more global view (which I suggest you do) you can add uncertainty surrounding Brexit and the new Italian government’s proposed budget.  You might say that all those things are not really news to the markets and you would be correct.  The problem is that there remains no clear end in sight.  A little more than a week ago prospects looked good for an end to the US-Chinese trade war but as the reality of the G-20 talks set in hopes faded and so did the market.  Things were made worse when it was reported that Huawei’s CFO Meng Wanzhou was arrested in Canada for allegedly violating US Sanctions on Iran.  The move against one of China’s largest companies was viewed as an impediment in the ongoing negotiations to end tensions.  The treasury yield curve has long been used quite accurately to predict the onset of recession and last week a small and obscure part of it inverted causing a bit of investor agitation. The negative sentiment and market movement that ensued was in sharp contrast to the prior weeks elation and gains.  Unfortunately, the reality remains that we are in a trade war with China and the Fed will continue to raise rates.  On to the Fed, the now-thought-to-be-dovish Fed Chairman Jerome Powell will continue to lead his FOMC to raise rates dependent on economic data and that data is really good!  In fact if you listen to all of the same superstar investors who came on to CNBC to say that stocks should be going up because earnings are great and the economy is the best it has been in a long time, you will note that they all struck quite a different chord just a week earlier as they berated the Fed’s rate hiking stating that higher rates have damaged the economy.

All of this jawboning is referred to as “talking your book” in Wall Street terminology.  The term refers to investors telling a story that only supports their portfolio, ignoring facts that would detract from their outlooks.  Let’s get to the facts:  1) the trade war is still on though the postponement of the second tariff hike is a small positive, 2) the economy as a whole continues to perform really well, though there are signs of slowing in interest rate sensitive sectors (specifically real estate), 3) speaking of good performance, the data dependent Fed can and will continue to raise rates as long as the economy keeps speeding along, 4) though the yield curve is flat and has been a good predictor of a recession, it has not yet inverted and even if it did recessions don’t immediately follow the inversion which can actually occur several times in advance of a recession, and 5) though it should not affect the economy, news of the Mueller investigation heating up is certainly adding some anxiety.  I would say that those facts are all enough uncertainty to cause traders to have some mood swings as we head into the last few weeks of a year that has left many institutional investors in the red with the scant few who are slightly in the green holding desperately onto their profits.  For longer term investors, ignoring the volatility and staying focused on long term goals will remain the key to long term success.  It is however, still important to speak with your advisor to ensure that your portfolio continues to match your risk appetites and goals.

Markets, which are in need of some positive stories, will be faced with a number of economic indicators in the week ahead (see attached earnings and economic calendars).  Today, we will get the JOLTS number from the Bureau of Labor Statistics and it is expected to show 7.1 million job openings up slightly from last month’s 7.009 million.  While job opening may appear to be a good thing, an increased number of openings can be interpreted as a tightening labor market in which employers will soon have to raise wages to fill openings.  That, of course is a big driver of inflation. In the days ahead, we will get the inflation numbers: PPI and CPI, Retail Sales, and Manufacturing PMI.  All of these numbers will certainly have the potential to improve the sentiment of investors, but what the market can certainly use in the week ahead is some news to improve investor sentiment.  With the Fed set to make their policy decision next week (71.5% chance of a rate hike), we cannot expect much out of them.  That leaves the trade dispute with China, and news of any positive progress on that front will be welcomed by the market.  Futures at this time are pointing to a negative open for stocks, but they have improved from their lows achieved in overnight Asian trading.  Please call me if you have any questions.

daily chartbook 2018-12-10

earnings releases 12_10

econ numbers 12_10