Retail Therapy

Retail therapy.  Stocks traded higher on Friday as investors looked to buy cheap stocks while bond yields finally stopped falling.  Bond buying finally relented on Friday and stock investors stepped in to buy the dip even in the wake of low confidence numbers.

 

MY TWO CENTS

 

1.  If you say so.  Controlling the narrative on the market is important… especially if you are running for President and your key selling point is stock market performance.  Last week in a rally speech President Trump offered this logic to the crowd: you have to vote for me, even if you don’t like me, because if I don’t get elected, the stock market will crash.  I am not sure I would base my investing on that, but the fact remains that the President and his team have done a pretty good job at moving markets around (in both directions) simply by making vague, mostly unsubstantiated comments regarding the state of the economy.  How can they have such an impact on the market with just a few words?  Well to start, you may have heard that there are computers that scour the news feeds (including Twitter, of course) looking for market moving information and they enter trades at the first signs of a juicy headline.  This is, in fact true!  All of the news is analyzed by algorithms and deemed either positive or negative.  Potentially negative news is followed by speculative selling and vice versa.  The speed of light is roughly 386,000 miles per second, so if my servers in Jersey City determine that a headline is positive and enter an order on the New York Stock exchange servers in Secaucus, the order would arrive and get executed within 10.3 milliseconds… that’s fast for those of you that are counting.  Hedge funds that specialize in that sort of trading put on small speculative positions like that all day long.  By the time an average trader sees the market pop, looks at the headline and puts in a buy order, the market has already moved up and the hedge fund has made a small profit.  Small moves often become larger moves if the headline really gets noticed and the moves get accentuated when the “slow” traders decide to jump in.  Before you go out and buy yourself a rack full of computer servers and hire a nerdy quant programmer, I feel compelled to tell you that most of those small trades made by the hedge fund often end up going nowhere and result in small losses by the fund, but because computers don’t sleep they just keep on going and eventually make up for small losses when a big headline hits.  Now back to the world of living, breathing investors.  This weekend, WHILE YOU RESTED, the Administration’s team of “headline makers” set out to make some statements… intended for the markets.  Larry Kudlow went on the talk show circuit and declared that the US Economy is in great shape (no numbers or facts given) and that Chinese trade negotiations were going well (also no real facts as back up).  Peter Navarro, also made similar, unsubstantiated claims.  Finally, the boss himself, President Trump also declared that the US Economy is in great shape and that if things get bad, it’s the Fed’s fault.  Seems like someone is looking to help markets continue their recovery after last week’s rout on recession fears.  The moral of the story here is that investors should seek facts and try to ignore sensational headlines, especially if they are not backed up with numbers.  For now, the numbers on the US Economy continue to look solid, though they are showing some signs of fatigue.  The fatigue in the domestic economy combined with the now irreversible drag brought on by the trade war along with a slowing global economy could cause the US economy to go into a recession at some point in the future… but only the numbers will tell us if and when.  For now, the economy continues to expand, but investors need to remain vigilant.

 

2.  Where has all the love gone?  Last week’s stock and bond markets were quite a roller coaster ride offering sharp dips and quick rips (a ripis trader terminology for a rally).  Trade jitters, global fears of recession, and rapidly dropping yields caused panic and selling.  Later in the week seller exhaust and dip buying caused markets to recover somewhat.  On Friday, the University of Michigan released its preliminary Sentiment Index, which is a comprehensive and closely followed gauge of consumer sentiment.  The number came in below expectations at 92.1 compared to last month’s 98.4.  The index is composed of two sub indexes which track sentiment on current conditions and future expectations.  Current conditions fell from 110.7 to 107.4 and future expectations went from 90.5 to 82.3.  So consumers’ sentiment about the current economy as well as the future fell within the past month.  “But wait,” you ask “didn’t the Fed just lower interest rates as an insurance policy against an economic downturn?  Shouldn’t that add confidence to the markets?” Actually, if you think about the cause of the rate cut being a slowing global economy, you might be little less confident to make that big purchase until things play out… maybe wait for THE NUMBERS to improve (see above). That is how consumer sentiment works.  I wrote about it in Friday’s market note.  If consumers get spooked and stop buying, the economy will lose momentum.  A confident consumer is good for the economy, so let’s hope that the preliminary number improves as the month goes on.  A confident consumer equals a growing economy.

 

THE MARKETS

 

Stocks rallied on Friday as bond yields slowed their free fall making way for value buyers in equities.  Traders largely ignored weak consumer confidence numbers and took advantage of oversold conditions to buy stocks on the cheap.  The S&P500 climbed by +1.44%, the Dow Jones Industrial Average traded up by +1.20%, the Russell 2000 rallied by +2.11%, and the NASDAQ Composite Index advanced by +1.67%.  Bonds were roughly unchanged and 10-year treasury yields climbed by +2 basis points to 1.55%.  Thirty-year treasury bond yields closed at 2.03% after closing below the 2% mark on Thursday for a record low yield.  The 2-year / 10-year yield curve which temporarily inverted earlier in the week causing a bit of panic selling, ended the week at +7 basis points.

 

WHAT’S NXT

 

– The week ahead will be a light week for economic releases and earnings.  Highlights include some housing numbers, manufacturing and services PMI, The Leading Index, and the FOMC Minutes from July’s meeting. Refer to the attached calendars of economic and earnings releases for details.

– Today, Eric Rosengren from the Boston Fed will speak, but the big Fed news of the week will come from their annual Fed Symposium in Jackson Hole starting on Wednesdsay.  Chairman Powell himself will speak on Friday, which is highly anticipated.

daily chartbook 2019-08-18

earnings releases 8_19

econ numbers 8_19