The Slow Walk

The slow walk.  Stocks limped through Friday’s close as trade fears became a thing again.  Friday’s session had traders contemplating a worst case scenario in the ongoing trade talks with China pushing bonds up and stocks down.

WHAT YOU NEED TO KNOW:

1) A deal with China is not a guarantee.  Administration officials close to the negotiation continue to offer up soundbites that present a mostly negative, if not cautionary tone on the progress of discussions.  Though it is most likely a tactic to jawbone China into a deal, mixed messages can have an effect on markets.  Steve Mnuchin and Robert Lighthizer will be in Beijing today to start a week of discussions and WHILE YOU SLEPT the White House floated the potential for a summit with Xi Jinping sometime soon at Trump’s Mar-a-Lago estate in Florida.  Stocks liked that in overnight trading.

2) Multinational companies are feeling the headwinds.  As we continue to progress through earnings season a pattern of domestically focused companies outperforming globally focused ones is emerging. Companies are citing the strong dollar, global economic slowdown, and the ongoing trade war as being the source of weaker sales.

3) Congressional operatives are struggling to come to an agreement on border security increasing the possibility of another shutdown.  Congress has until Friday to agree upon, vote, and get Presidential approval on a budget to avoid another shutdown and, WHILE YOU WATCHED THE GRAMMY AWARDS, congressional leaders called it a night still at an impasse.  Today will hopefully yield more fruitful results.

Stocks retreated in the later half of last week as trade fears began to creep back into the trader psyche. Friday’s session saw aggressive selling through the early session followed by a steady rise and aggressive buying into the close leaving a mixed close for the major indexes.  The last minute buying was barely enough to keep indexes in good technical standing with the Dow closing just a hair over its key support of 25000.  Similarly the Russell 2000 closed just above its key support at 1500.  Both the S&P and NASDAQ were unable to end the week above their key resistance lines.  See charts 3, 5, 6, and 7 in my attached daily chartbook to get an overview of the trend of the major indices.  My regular readers know that I rely on the bond markets to get an enhanced view of broader market drivers. Bonds tend to reflect policy and current economic conditions leaving very little room for the emotional, crowd driven moves that tend to dominate the equity markets.  The result is less volatility and that is precisely why well managed, diversified portfolios include exposure to bonds.  With respect to what bonds might be telling us about the future state of the economy we can see that they have been trending up since early November indicating that there may be trouble ahead (see charts 19 and 20 in my attached daily chartbook).  The Fed too is concerned, which is why they halted their rate hiking activity, a move which pushed yields down further.  Despite the equity markets’ aggressive rally since the December 2018 lows, bonds have continued along their positive trend.  The message here is a cautionary one.  While equity markets celebrate the Fed policy shift, investors need to remember the reason why the Fed shifted policy and make careful decisions on their equity investments as conditions can change quickly in this late cycle economy.

TODAY:  No economic releases this morning, but we will get a read on domestic inflation with the release of the Consumer Price Index and Producer Price Index later in the week.  We will also get a read on retail sales, Industrial Production, and University of Michigan Consumer Sentiment Index. With about 2/3 of S&P500 companies posting earnings to date, the week of earnings will begin to wind down.  This morning, we will hear from Loewes and Avaya amongst a few others.  After the bell, earnings include global chemical manufacturer Huntsman and Brighthouse Financial.  Please refer to the attached weekly economic and earnings calendar for specifics.  The week will be dominated by ongoing trade talks and another looming government shutdown.

daily chartbook 2019-02-11

earnings releases 2_11

econ numberd 2_11

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