A Trifecta of Hope

A trifecta of hope.   Stocks rose a second session in a row on dovish intentions from China and Germany combined with a small positive move on trade.  Once, again, buyers rushed in to buy stocks hoping to cash in on the recent downturn in equities.




  1.  Some shelter in a growing storm.  Stocks spent the past two sessions recovering some of the losses from prior sessions which were largely driven by the threat of recession.  Yesterday’s broad stock rally was driven by a PBOC move to lower borrowing rates to stimulate investment, Germany’s pledge to spend money in fiscal stimulus if things get worse, and some small overtures in the US-Chinese trade negotiations.  All good, for sure!  But are these enough to power markets on a longer, more sustained, positive trend?  Later this week economists will be meeting at the Federal Reserve’s annual Jackson Hole retreat.  Sure there will be some great soundbites out of Fed bigwigs which will feature a finale speech by Chairman Powell.  Thinking about what the group will actually discuss in their private discussions is the stuff that keeps me up at night.  They will surely discuss: a) The growing number of central banks beginning to lower rates putting pressure on the Fed to do the same. b) The growing Federal budget deficit as a result of the 2017 tax cut, which has not generated the revenue intended… especially now that the Administration is reportedly considering another tax break to juice spending (and voting). c) A hard Brexit’s negative impact on not only the UK economy but also the EU which can easily be pushed into a recession as a result. d) New signs that Italy will defy its EU benefactors and start spending too much, putting more political pressure on an already beleaguered EU. e) The what is now referred to as 4-sigma event in which (a likelihood of 0.27% chance of happening – in other words highly unlikely) Argentinian markets dropped and how that will impact the many public and private funds that hold Argentine debt. f) Zero or negative interest rates will certainly be on the list. The Fed has very little room to lower rates in the event that the economy slips closer to a recession, being as low as they currently are.  Never mind Fed policy, markets themselves can push longer maturity yields into negative territory as implied by recent moves in ten and thirty year treasury yields.  g) Geopolitical tensions in the Middle East and North Korea.  h) Everyone’s favorite topic by now: Impacts from the US Trade war with China.  That’s a big list to cover in just a few days, but don’t worry, those folks are pros… and they happen to be the same people who are in charge of monetary policy.  Tough times, tough decisions.


  1.  Self fulfilling prophesy.  In my last two notes, I wrote extensively on the importance of Consumer spending and confidence in keeping the economy growing.  I mentioned the performance of the stock market impacting consumers that may not even own stocks.  Clearly when consumers are employed and wages are growing, folks will continue to spend money, so low unemployment and growing wages are a positive factor in keeping the current expansion growing.  Finally, I discussed hard-to-quantify confidence and where it comes from.  Last week, it became clear that investors were starting to ponder the reality of a potential recession, and Friday’s University of Michigan Consumer Sentiment Index, indicated a drop in sentiment, although it is too early to determine if it is a trend.  These are things that have been both positive and negative for the economy.  But what about the “R” word.  Many in the public sector are reticent to use it for fear of… creating fear.  Most average people walking into Walmart or browsing on Amazon don’t refer to economic indicators (or my daily note) before making purchases.  Moreover, the vast majority of shoppers don’t watch financial news or read the financial section of the newspaper.  They do listen to the radio and watch mainstream news.  As the President has recently been stirring the pot in his non-campaign campaigning, the economy has been coming up a lot.  He has been quite vocal in his blaming the Fed for the economy while simultaneously stating that the “economy has never been better”.  The administration is also considering an additional tax break despite the controversial impact of the last tax break.  Many are wondering if the Administration may be concerned that the US Economy is not as strong as they would like us to think.  All of the noise has attracted the attention of mainstream (I mean major networks, not cable news) media, which is less worried about using the “R” word (recession).  When average folks hear that over and over in the background, it can affect their buying habits.  It’s just a matter of time before your mom or hairstylist brings up the topic… which can’t be a good thing.




Stocks posted a broad-based rally yesterday in which all sectors rose in response to new potential economic stimulus on the global stage and some positive movement in Sino-US trade negotiations.  The S&P 500 leapt by +1.21%, the Dow Jones Industrial Average climbed by +0.96%, the Russell 2000 traded up by +1.02%, and the NASDAQ Composite Index advanced by +1.35%.  Bonds eased back for a second session bringing 10-year treasury yields up by +5 basis points 1.60%.  The dollar continued its climb yesterday and remains close to highs as foreign banks display more dovish behavior then the Fed and because US yields, while low, are still higher than many others.





– No economic releases today but we will hear from San Francisco Fed President Mary Daly and Vice Chair Randal Quarles in separate engagements.

– Home Depot beat earnings this morning by +2.6% and Kohl’s beat by +1.4%.  We will also hear from TJX before the bell and Lowe’s post close.

daily chartbook 2019-08-20


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