All You Can Eat

All you can eat.  Stocks rose further into uncharted territory on Chinese trade announcements, earnings, and just plain, bold optimism.  The Coronavirus may hurt global economic growth but stock investors are hungry for more record returns.




Round and round it goes…  Lately, stock investors are undaunted by high valuations and macro risk.  It must be said that the US economy is hanging in there, so I am not at all ringing the evacuation bell, but at some point stock prices do need to true up to at least some underlying reality. How is it that stocks have gotten to all time highs, yet again, in the midst of a costly global health crisis, a cooler but still simmering trade dispute between the two largest economies, and a completely paralyzed legislature? Consumers continue to do their share and remain confident, so that is a big positive checkmark. However that is only good enough to keep the economy growing at a +2.1% annualized pace, far from a boom.  A big factor for the growth in equities remains the Federal Reserve.  The S&P500 is now +42% higher than its low from December of 2018 – a flight triggered and maintained by the Fed’s dovish shift and three consecutive rate cuts.  They are not alone as central banks around the globe have also been cutting key interest rates to keep their economies from slipping.  The Eurozone is amongst a group of four economies that actually have negative statutory interest rates – an experiment that hasn’t yet proven to be effective.  Let’s take a step back and remember that interest rates are lowered by central banks to make it cheaper for corporations… and consumers to borrow money with hopes that they will spend more and goose the economy.  After a long period of low interest rates US corporations are full-up on debt as they have taken full advantage of the rate environment.  I have highlighted that corporations are not spending as robustly as one would hope given cheap money and fresh cash from tax savings related to the 2017 tax bill. Consumers are spending.  Lower mortgages have certainly driven home sales.  Builders are building more in response to the increased demand and lower project finance costs.  All of these contribute to US economic growth, which as I mentioned above, is good but still not roaring.  There is another function that the Fed serves.  Its accommodative stance provides investors with confidence.  AKA the “Powell Put”, when investors feel that the Fed will do whatever it takes to keep things moving along, they are emboldened.  To put a finer point on things, if bond buyers know that the fed is buying bonds constantly they are more confident to buy themselves.  If things get tough the Fed is left with only 1.75% of interest rates to cut before they hit zero.  After that they have quantitative easing which includes direct purchases of securities… ah a backstop… more confidence.  Let’s get back to that debt for a second.  The one thing that the Fed cannot do is forgive debt.  If the economy slips into a recession leaving debt ridden corporations and consumers unable to pay their debt, asset prices will suffer.  This leads us to conclude that much of the recent parabolic growth in the stock market is driven by speculation. This is a time for careful consideration of investments and diversification of risk.




Stocks moved up modestly yesterday to new highs as China attempts to make good on its trade commitments in the midst of the virus chaos.  The S&P500 climbed by +0.33%, the Dow Jones Industrial Average traded up by +0.3%, the Russel 2000 slipped by -0.27%, and the NASDAQ Composite Index advanced by +0.67%.  Bonds advanced slightly and ten-year treasury yields fell by -1 basis point to 1.64%.  Crude oil held steady, advancing slightly by +0.39%, as traders remain hopeful for an OPEC+ supply cut.




– Non-Farm Payrolls are expected to have grown by +165k jobs compared to last month’s +145k. The whisper number is slightly higher in the wake of the strong ADP number earlier in the week.

– The Unemployment Rate is expected to have remained constant at 3.5%.

– Average Hourly Earnings may have ticked up by +0.3% month over month, slightly faster than the prior month’s +0.1% growth.

– The Fed will release its semi-annual Monetary Policy Report to Congress at 11:00 AM EST.

– This morning Hanesbrands and MSG beat expectations.  We will still hear from AbbVie before the bell.

– Plenty more earnings next week with some key economic releases as well.  Check back on Monday for details.



daily chartbook 2020-02-07

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