Ho hum. Announced the stock market in yesterday’s session as progress on trade talk with China was largely ignored resulting in a largely flat close. Stocks began the day with a surge on the heals of good news from the Chinese government which has been not only talking positively but actually reversing some of their tactics. As the session went on the markets slipped from red to black multiple times indicating that trade might no be the only thing on investors’ minds as we head into the final weeks of the year. The markets have most likely already priced in the single Fed rate hike expected next week and a milder Fed for 2019, putting that hurdle on the back burner. The markets have also taken a “show me” stance on China trade talks in which news is considered noise unless tangible action is taken such as China’s actual resumption of American soy bean purchases. A new fear appears to be emerging which involves the potential for economic slowdown in 2019 despite the majority of economic indicators remaining healthy. More and more analysts and economists are taking on measured language indicating that while they may not be bearish, they are factoring in the potential for negative surprises in the year ahead. Traders have been factoring that potential also, as we have noted their clear penchant for defensive sectors. The move is quite evident when we observe two specific charts in my attached daily chartbook. Chart 2 shows sector performance over the trailing 60 trading days and the two most defensive sectors: consumer staples and utilities are the only two with positive returns. Chart 16, my Growth Relative to Defensive indicator is and has been trending down since it peaked in early summer, indicating that defensive stocks are outpacing growth ones. Indices were able to make new all time highs in the interim in what may have been their last speculative surge driven by a strong 2Q earnings season and outright speculation. Where does that leave us? Perhaps a chart that I don’t often refer to paints the most accurate picture. Chart 3 shows the trailing 12 months of the S&P500 and the Aggregate Bond Market. First the charts. The top panel shows the S&P 500 experiencing volatility and negative crossovers before a surge and then finally back to volatility and negative crossovers. Bonds, on the bottom panel, spent the entire 12 months below water with a few respectable but unsuccessful attempts to reversing their demise. The bond market’s final surge was its most successful, catching many speculators off guard. Now to the number in each panel. Stocks grew +.74% in the last 12 months and bonds fell -0.77%, both almost flat. Yesterday, the S&P 500, Dow Jones Industrial Average, and NASDAQ 100 all closed slightly positive, while the Russell 2000 closed down -1.55%. All of the indices remain risk off. The ten year bond will start this mornings session at 2.87% and the two year treasury note yields at 2.72%, still a bargain in my book.
Today we get Retail sales which is expected to show a month over month increase of +0.1% versus last month’s +0.8%. Industrial production is expected to show a growth of +0.3% month over month versus last period’s +0.1% number. US Manufacturing PMI is forecast to have fallen slightly from 55.3 to 55. These numbers all have the ability to ply the markets which remain on a hair trigger. Overnight WHILE YOU SLEPT the Chinese government announced that it will reverse the tax charged on imported Autos, another sign of progress. China also posted some negative economic numbers indicating that the trade war may be having some negative impact on the world’s second largest economy. Have a great weekend and please call me if you have any questions.