No restrictions… kind of

No restrictions… kind of.  Stocks rose yesterday as the Treasury walked back its reported plans to restrict US investment in China.  Happy investors were unfazed by a weak PMI number and chose to buy on trade hopes.

 

MY TWO CENTS

 

1.  The most hated rally.  With the third quarter in the books it is worth noting that Q3 marks the third straight quarter in a row for gains on the S&P500 which is up +18.74% year to date.  Even once sleepy bonds are up for the year with the aggregate bond index up +8.52%.  But if you are on the ground watching the market, the news, and hopefully reading my daily market note, it might not feel like we have covered so much positive ground since ringing in 2019.  After all, this year so far has seen the US trade war escalate in both rhetoric and tariffs, Brexit fall apart at least three times, a decline in corporate earnings growth, slipping in US manufacturing, slowing economic growth in the US, a significant weakening in EU economic growth, China’s economy declining significantly, and an inverted yield curve to name just a few.  Oh, and throw in lots and lots… and lots of political unrest.  So how did we get here, really?  The short answer is: central banks.  The US market has been on rough seas for the year but all the while Chairman Powell has been at the helm orchestrating the markets rise, which started after the worst December since the Great Depression.  Powell and Fed went into high gear easing tensions with dovish talk letting the market know that the Fed has its back.  Finally, the Fed made good on its promise by cutting interest rates twice this past quarter.  With lower rates, companies can afford to borrow more money and hopefully spend it on growth.  Lower rates also mean cheaper mortgages and consumer credit which should, in theory, spur consumers to buy more homes and high ticket items.  So the fact remains that while the US economy is showing some signs of weakness, it is still moving along and the Fed is helping it do so.  It is also important to note that with bonds experiencing such a rally and the Fed lowering statutory rates, yields from fixed income are so low that stocks continue to look attractive.  The S&P 500 has a 1.9% dividend yield compared to the 10-year treasury which has a yield to maturity of 1.74%.  Other models compare the S&P500 earnings yield to bonds.  With an earnings yield of 5.1%, the S&P500 appears to have a better fair value than bonds, despite its P/E of 19.5 being higher than the 10 year average of 18.  Stocks have surely done well year to date and with October being historically one of the best months for stocks, one wonders if we have some more room on the upside, even in these unsure economic times.  Finally, it is important to note that while the year to date figures look good for stocks, the growth came on the heels of a -13.7% decline in the 4th quarter of 2018. Onward to 4th quarter of 2019 with high hopes… and the Fed.

 

2.  Crude behavior.  Yesterday, West Texas Intermediate crude oil fell by -3.29% to $54.07 per barrel, which is right around the level it was prior to the drone strike on Saudi oil fields.  The weakness in crude oil was largely due to the Saudis bringing their damaged fields back online.  With crude, it is important to remember that it is a game of supply and demand.  More supply from repaired oil fields means lower prices, plain and simply.  But crude oil has been having a rough ride for some time and is down roughly -30% in the last 5 years.  Wanna gander a guess as to why?  Supply and demand.  The last five years have witnessed the rise of the US shale producers adding significant supply to the global economy.  Increased supply, lower prices.  In the last few years China has been experiencing an economic slowdown. China is the second largest economy in the world and is also the second largest consumer of oil, behind the US.  A weakening economy has led to a fall off in demand for crude.  Lower demand, lower prices.  How does it impact stocks?  Energy, the worst performing sector for Q3 has lost roughly -34% in the past 5 years.  While supply has nowhere to go but up (lower prices), demand has a chance to save the day when the global economy recovers and starts to pick up again.

 

THE MARKETS

 

Stocks climbed yesterday ending the quarter with a positive push on renewed hopes that a trade deal with China might be made soon… like next week.  The S&P500 climbed by +0.5%, the Dow Jones Industrial Average advanced by +0.36%, the Russel 2000 traded up by +0.19%, and the NASDAQ Composite Index rose by +0.75%.  Bonds also advanced and 10-year treasury yields slipped by -2 basis points to 1.66%.

 

WHAT’S NXT

 

– Markit Manufacturing PMI is expected to come in at 51.0 even with last month, while the ISM Manufacturing PMI is expected to be at 50.0, up from last month’s 49.1.

– Construction Spending is expected to have grown by +0.5% month over month compared to last month’s growth of +0.1%.

– Chicago Fed President Charles Evans, Fed Vice Chairman Richard Clarida, and Fed Governor Michelle Bowman will all speak today.

– McCormick will announce earnings before the bell and Stitch Fix will report after the close.

– See the attached weekly earnings and economic calendars for details.

 

I am in town, South Florida

Another reminder that I will be between our Boca Raton and Miami offices this week meeting with clients.  Please reach out and schedule some time with me.

daily chartbook 2019-10-01

earnings releases 9_30

econ numbers 9_30