Can’t Fight That Feeling

Can’t fight that feeling.  Stocks traded to new highs yesterday as traders gave the Phase One deal an encore.  The Eurozone applauded along with their American cousins finding new highs as well.

N O T E W O R T H Y

• Brrrrrexit.  In yesterday’s note I wrote about the unknown, now kind-of-known factors helping to usher in a strong end-of-year performance for stocks.  That was certainly an ingredient in yesterday’s trade action.  One of the those formerly unknown factors was Brexit.  Brexit never really ever made it to the “front page” with US stock traders, partially because the UK economy is not closely tied to the US economy, UK politics and the whole Brexit thing is difficult for most Americans to understand, and finally the trade war with China overshadowed most other news.  I try to highlight Brexit now and again because I believe that it can have adverse effects on the US economy.  The UK may not be a big trading partner of the US, but the European Union is, and Britain is a big factor in EU strength.  For one, it is… or was… or may still be the European financial hub.  Well, you see, therein lies the problem.  Last week’s Conservative Party victory in the UK general election all but guarantees that PM Boris Johnson will push his Brexit deal through Parliament in the coming weeks.  The Pound Sterling, UK stocks, and EU stocks rejoiced yesterday.  However, there is one detail, which may have been overlooked by the partiers:  Brexit is just the beginning!  Once the UK exits the EU, they must negotiate a trade deal with their former state mates.  As you might guess, that will be no easy task, and the rules set out a one-year transition period for the negotiation.  If it took that much wrangling to get them to leave, one could assume that negotiating trade pacts will be yet tougher.  Not to worry, WHILE YOU SLEPT freshly emboldened Boris Johnson made some comments to the effect that he will change a law that would not allow the transition period to go beyond 2020.  Uh oh, back to unknown territory.  In response to Johnson’s comments, the Pound was pounded over night, giving up much of the gains achieved since the election win.  Did I mention that the newly single UK has to negotiate trade deals not just with the EU but also everyone else, you know the US, China, Russia, Canada, etc., etc.  Should be easy.
• Over there.  The past few years have been tough for the EU.  They have been struggling to figure out how to deal with a refugee crisis, negotiating with defector UK, the Eurozone economy has been slowing and even contracting in certain areas, and they are living with negative interest rates.  A big part of the EU’s economic woes has come from trade uncertainty.  In fact, if you look at the STOXX Europe 600 Index, you would note that it has traded sideways throughout the trade war.  Now that the trade war seems to be thawing a bit, investors may start to seek out some value in Europe.  Perhaps they did just that yesterday as the STOXX 600 hit a record high yesterday.  The first record since April 2015!
• Chicken or egg.  Many traders believe that the stock market is the economy.  After all, the information age is in full swing and stock prices should, in theory, reflect all known information about the company and the economy.  Never mind those stodgy economic numbers that come out once a month telling us how well the economy did last month.  But is it correct to assume that the economy is doing well if the stock market is doing well?  I think you probably know the answer to that:  “it depends”.  Clearly stocks as a whole do better in times of economic growth and vice versa, so there is a correlation… at a high level.  But let’s remember that stocks go up when demand for them increases.  What causes demand for stocks?  Investors who are speculating that things will be good for both the company and the economy going forward.  The real question is what are these investors basing their bullish thesis on?  Is it the economic numbers, forecasting future economic strength, or the companies’ own forward guidance?  More and more companies in the US have been lowering future guidance and economic growth is tepid at best, meanwhile the S&P500 is up +27.3% year to date and closed at an all time high yesterday.  In Europe, the STOXX 600 closed at an all time high yesterday as Eurozone PMI’s are below 50, indicating contraction.  Stock investors, perhaps believe that the global economy will turn around in 2020 and want to make sure that they are invested when the turnaround occurs.  They may be right, who is to say.  So to answer the question, I would pick: C) All of the above.

THE MARKETS

Stocks traded to fresh highs yesterday on further enthusiasm over the Phase One deal agreement.  The S&P500 climbed by +0.71%, the Dow Jones Industrial Average traded up by +0.36%, the Russell 2000 advanced by +0.73%, and the NASDAQ Composite Index jumped by +0.91%.  Bonds slipped yesterday and 10-year treasury yields added +5 basis points to close at 1.87%.  Crude oil remained strong, closing up +0.23% to $60.21 as traders are hoping for demand strength from China resulting from the trade deal.

NXT UP

– Housing Starts are expected to rise by +2.4% compared to last month’s increase of +3.8%.  Building Permits are expected to have slipped by -3.5% compared to last month’s +5.0% growth.

– Industrial Production may have advanced by +0.9% compared to last month’s slip of -0.8%.  Manufacturing Production is estimated to have grown by +0.8, up from last last months -0.6% slowdown.

– Dallas Fed President Robert Kaplan and Boston Fed’s Eric Rosengren will speak today.

– Cintas and Fedex will release earnings after the bell.

daily chartbook 2019-12-17