Nice and easy does it every time

Nice and easy does it every time.  With both sides playing nice, sentiment on trade is improving propping up equities.  Stocks closed mixed and virtually unchanged on Friday as investors await the Fed and attempt to figure out a new strategy,

 

MY TWO CENTS

 

1.  Very, very interest-ing.  Last week marked a punishing week for bonds as stocks moved higher for a third straight week.  But the details of the market’s moves still have many scratching their heads.  10-year treasury yields rose by +33 basis points after bouncing off of lows in the prior week.  For stocks, it was a different story, as investors clamored for value stocks, shunning the usual go-to momentum stocks.  Despite the recent warming between the US and China in trade negotiations, the global economy is far from realizing any benefits, which will most likely be an affliction on growth for some time.  Then there is the budget deficit.  You know, that thing that nobody really pays attention to until things get rough.  Just last week, the Government announced that the budget deficit over the 11 months leading up to September now exceeds $1 trillion.  Budget deficits grow and recede and typically swell during times of recession, not in an expansion.  Such a large deficit will make it difficult for the US Government to apply fiscal stimulus if things really get rough.  Bond traders are acutely aware of this challenge, which had a lot to do with why bonds have been trading up so rapidly… until the end of the Labor Day week in which they dropped adding almost a half percentage point in yield.  Why the sudden drop?  Most likely because bonds went too far too fast, leaving money managers over-allocated in fixed income.  Further, as announced here in my note, Apple and Disney along with many others hit the market with exceptionally large bond offerings in an attempt to take advantage of the prevailing low rates.  The large supply put pressure on the whole bond market.  On the other side of town, stock investors poured their capital into value stocks and sectors.  The Information Technology sector dropped last week while Financial, Energy, and Materials sectors all added more than +3%.  Also under pressure were interest rate sensitive stocks such as Utilities, which were hit hard following bonds, as they typically do.  The reason behind the shift is still a bit of a mystery.  While some may view value stocks as being fairly valued at the stock market’s highs, they can be more volatile and have more downside in an economic downturn.  As we close in on the FOMC meeting later this week, it will be important to see if the trend continues.

 

2.  The political economy.  I write a lot about consumer confidence being perhaps the most critical component of a growing economy.  The consumer, after all, represents 2/3 of GDP.  If consumers lose confidence and stop making purchases the game is over.  In the past 2 years, business investment, which represents around 15% of GDP has been waning as a result of global trade concerns.  That slowdown has and will continue to impact US GDP.  The good news is that consumers have not slowed down their purchasing habits as they remain somewhat confident.  There are several numbers that we follow to track the level of consumers confidence.  One in particular is very interesting due to the level of granularity it provides.  The University of Michigan Sentiment Index is released several times throughout each month and economists look carefully at the confidence index as well as indexes on current conditions and future expectations.  Last Friday, the preliminary release showed sentiment at 92.0, beating expectations and increasing from last month’s read of 89.8.  What’s more, current conditions increased from 105.3 to 106.9 and expectations increased from 79.9 to 82.4.  The slight improvements in sentiment is good news and most likely a result of the recent de-escalation of trade tensions between the US and China.  What many people don’t realize is that the economic number includes a wealth of other information along with the aforementioned numbers.  Lately, one of the more interesting components of the release is sentiment by political party identification.  That number shows sentiment amongst Democrats decreasing from 75.7 to 67.6, while sentiment increased for Republicans and Independents.  Sentiment grew for them to 117.5 from 112.8 and to 91.9 from 86.3 respectively.  That may be good news in some political circles but for me the top line figures are still the most critical, and those remain somewhat healthy.  Further evidence of a healthy consumer also came in the form of last Friday’s Retail Sales number which beat expectations growing at +0.4% month over month down from last month’s revised +0.8% growth.  I will mention it one more time: the consumer IS critical.

 

THE MARKETS

 

Stocks closed out the week mostly unchanged marking a third straight week of gains driven by goodwill gestures by both the US and China, expectations of Fed stimulus, and the ECB announcing a stimulus package for the EU.  The S&P500 slipped by -0.7%, the Dow Jones Industrial Average climbed by +0.14%, the Russell 2000 advanced by +0.2%, and the NASDAQ Composite Index fell by -0.22%.  Bonds fell and 10-year treasury yields climbed by +12 basis points to 1.89%.

 

WHAT’S NXT

 

– Markets will start the week off with volatility in response to the drone strikes on Saudi oil fields, WHILE YOU WATCHED FOOTBALL.  Also, WHILE YOU SLEPT, China released some figures pointing to a further slowdown of its economy.

– Empire Manufacturing Index, a regional read on manufacturing in the New York Fed Region is expected to have fallen to 4.0 from 4.8.

– The week ahead features a whole host of housing numbers, Industrial Production, The Leading Index, and a number of regional Fed reports.  The highly anticipated FOMC meeting will kick off tomorrow and announce policy followed by a press briefing on Wednesday.  The Fed is largely expected to lower its Fed Funds target by -25 basis points, though the real news will most likely come from the policy statement and the briefing. Please refer to the attached earnings and economic calendars for details.

daily chartbook 2019-09-15

earnings releases 9_16

econ numbers 9_16