About face?

About face?  Markets slipped yesterday mainly on trade fears as traders were reminded that a US – China trade resolution is not a done deal.  On a second day of losses, stocks paused and gave up some ground on the first bit of negative news in a while.


1) Trade talks may not be going as well as many believe.  Yesterday afternoon President Trump announced in an interview that he probably will not meet with Chinese leader Xi Jinping prior to the March 1st deadline for the next tariff hike.  Tariffs are scheduled to go to 25% on $200 billion of Chinese imports if there is no resolution.  Additionally, WHILE YOU SLEPT, Politico reported that the President will sign an executive order banning Chinese telecom equipment from US wireless networks.

2) Earnings releases continue to beat on par with past quarters but guidance is increasingly negative for future releases.  Many analysts are concerned that we may experience what some are now referring to as an “earnings recession” this year.  More than 70% of S&P500 companies have reported earnings and slightly more than 50% of them have beaten Wall Street estimates on EPS.

3) The European Union lowered its expected 2019 GDP growth to +1.3% from +1.9%.  The announcement supports a growing fear of a global slowdown which also referenced the US Fed in their decision to shift its stance.

4) It is possible that current rates may actually be restrictive rather than neutral.  St Louis Fed Chief James Bullard suggested that more reserves, or money supply, will be needed in the year ahead in which he expects growth to be “considerably” slower than 2018.  He is not only referring to rates, in which he implies that they should possibly be lowered, but also the balance sheet.  Remember from this week’s geek-out Wednesday (https://www.siebertnet.com/blog/index.php/2019/02/06/cue-the-applause/ ) that as the Fed continues its balance sheet runoff, it is removing money from the money supply, which is restrictive.  The Fed can increase money supply by purchasing securities or by conducting repos.

Yesterday’s day of trade reminded traders that markets can also go down in a chaotic day of trade that saw all the major indexes slip.  Markets have existed in a state of nirvana since the Federal Reserve came to the rescue in late December effectively backstopping the markets worst December since the Great Depression.  The Fed’s temporary policy reversal combined with the change over of the calendar year gave traders the thumbs up to get back in and well… buy.  The return of investor positivity helped power stocks up last month making it the best January performance in 30 years.  Stocks have a tendency to be forgiving and tend to have short memory for bad news often applying a glass half full mentality.  This can be evidenced in the market’s performance since Powell began jawboning the market up and announced a policy change after the last FOMC meeting.  Markets have clearly reacted positively to the Fed taking a less restrictive stance making the Fed the primary driver of the recent rally.  While the Fed’s policy shift to temporarily halt its rate hiking is positive news for sectors that are interest rate sensitive (particularly housing), the positive reaction of the broader markets may be somewhat overdone.  The Fed cited global economic cross currents for their decision to soften its stance.  That means that the Fed is concerned about something in the future that might have a negative impact on the US economy.  A gloomy forecast on the US economy is a bad thing right? Based on the performance of the markets since the initial Powell revelation in late December indicates that the markets are happy with the effects (the halting of rate hikes) over the causes (increased possibility of recession).  To be clear, that doesn’t mean that the market is completely ignoring the risks, but rather the fears are suppressed by the animal spirits that have been driving this most recent rally.  When the market gets its first bit of bad news in a while and it is a slow week for economic releases (made worse by the recent government shutdown), it usually has a significant impact. Yesterday, the S&P500 fell by -0.94%, the Dow Jones Industrial Average slipped by -0.87%, the Russell 2000 sold off by -0.82%, and the NASDAQ dropped by -1.32% (the NASDAQ composite index slipped back into correction territory).  Bonds traded up yesterday as 10 year yields retreated to 2.65% and the 2/10 yield curve steepened slightly to 17 basis points.  For some additional perspective, one year treasury bills are around 2.4%, which is not a bad risk free return.

Today, we have no economic news to contend with leaving the markets to contemplate overnight and EU releases to set the mood for today’s session.  We will get a number of earnings releases prior to the bell.  Releases include PG&E, Goodyear Tire & Rubber, Hasbro, and Phillips 66.  Next week will be another week of earnings and a more substantial calendar of economic releases including inflation figures and retail statistics.

daily chartbook 2019-02-08

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