Keep on lovin’! Equities continued their climb yesterday as more positive reports continued to flow out of the once thought to be deceased capital. All of the major indexes traded up on in line inflation numbers and a diminishing fear of another shutdown.
WHAT YOU NEED TO KNOW:
1) WHILE YOU SLEPT, “persons” close to the President indicated that he is considering delaying the March 1st deadline by 60 days as talks in China are going exceedingly well. Markets cheered the news in overnight trading. Hopes for success with Beijing were a big driver in yesterdays equity rally as Chinese Leader Xi Jinping is considering a meeting with the American delegation on Friday.
2) Congress is set to vote on the funding bill proposed to the President and it is expected to pass. Though Trump has not specifically agreed to sign the funding bill, his comments certainly suggest that he will. Though there is always tail risk with events like these, the market is factoring in his signing. If he doesn’t… well you know.
3) Stock buybacks are becoming a thing… with both sides of Congress. There has been some growing noise coming from lawmakers who wish to curb corporate stock buybacks in a move to narrow the wealth gap. Stock buybacks are at record levels with around $1 trillion worth of stock purchased in 2018 and more increases expected this year. The buybacks are certainly a major factor in propping up stock prices in recent years and restrictive legislation could affect the waning bull market. A collection of Marco Rubio tweets that flew across the wire stating his support for the restrictions did little to affect yesterday’s market ascent.
Equities were able to extend their recent rally yesterday as the hurdles that plagued the markets in December slowly melted away. First, as the government shutdown fades into history Congress is set to vote on the freshly negotiated budget which required compromise on both sides. The compromise will not only prevent the government from shutting down again but also shows that Congress may be capable of producing legislation, which could be good for equities. Second, though the details are sketchy, all of the data points that are coming out of the ongoing negotiations between the US and China indicate progress. The market has been very happy with the progress, baking in success more and more each day. The big risk that remains is not if we will get a deal but rather what will the deal include. With the two big hurdles mostly out of the way, markets are left to contemplate if and when to deal with all of the lowered expectations for slowing economic and earnings growth. Though it is not a factor yet, the debate will likely heat up after earnings season as all of the results are tabulated. Yesterday’s move in equities included the S&P500 rising by +0.3%, the Dow Jones Industrial Average increasing by +0.46%, the Russell 2000 trading up by +0.31%, and NASDAQ 100 adding just +0.02%. As all of the indexes reflect slightly different aspects of the broad equity market it is healthy when all of them participate in a rally such as we have witnessed in the recent move. For example, the fact that small caps represented by the Russell 2000 are rallying along with the large cap industrials from the Dow is a positive sign that recent bullishness is not limited to just one group of stocks. Bonds traded down slightly in yesterday’s session with the broader bond market moving down by -0.1% and the ten year treasury yield inching up to 2.7%.
This morning we will hear from the Bureau of Labor Statistics with their Producer Price Index. This important reading is likely to show that prices paid by producers increased by +2.1% year over year versus last month’s +2.5%. The PPI Ex Food and Energy is expected to have grown by +2.7% down slightly from last month’s figure of +2.8%. We will also get the December retail sales numbers which were delayed by last months shutdown and they are expected to show a monthly increase of +0.1% versus the prior period’s +0.2% growth. We have a number of pre-bell earnings releases this morning which have had mixed results. Despite earnings, the market seems content to spend some more time basking in the potential success of the China trade discussions. But the day is young and anything can happen when passions run high. Have a Happy Valentine’s Day and please call me if you have any questions.