All around the world

All around the world.  Stocks climbed yesterday helped by earnings and somewhat positive news from around the globe.  Weak economic numbers were largely overlooked as stocks inched closer to highs.

 

MY TWO CENTS

 

1. Crack on.  Yesterday’s markets were somewhat excited to see British Prime Minister Boris Johnson emerge from talks with European Commission President Jean-Claude Juncker with a smile… and a deal.  The ongoing Brexit saga, which has lasted for years, has had many ups and downs and involved many twists and turns.  So many, in fact, that I would argue most investors don’t even understand how to deal with it.  Remember way back when — UK citizens voted in a referendum to leave the EU on June 23, 2016.  The polls all suggested that the UK would remain in the European Union.  Then the shocker came.  They wanted out!  The US stock market went into panic mode with the S&P500 falling as much as -5.3% in two days.  That doesn’t sound like much today, but you may recall that stocks were in the midst of a recovery from an awful fourth quarter in 2015 in which stocks fell around -13%.  Remember that?  The good news was that cool heads ultimately prevailed.  In fact, the headline on my daily market note on that day was “keep calm, carry on!”  While the decision to leave the EU may have looked awful on the surface, its initial impact on US companies would be minimal.  It took about two days, but the panic gave way to a buying opportunity and stocks quickly rose to new all time highs.  It seemed at that point that traders filed Brexit in the “do not care” file never to open it again.  Then all the craziness started, which included complicated and misunderstood parliamentary wrangling.  There were many opinions about just how bad Brexit would impact both the EU and Britain, while in the US investors were focused on the newly elected President.  Turn the clock forward and the US embarked on a trade offensive with Canada, Mexico, China, Japan, and the European Union.  All of this opened the eyes of many investors adding clarity to the complicated relationship the US has with all of its trading partners.  Sounds bad doesn’t it?  Well, Canada and Mexico were ultimately dealt with by creating a new agreement, which was not much different than the old one.  Japan?  Same thing.  The EU battle has been on pause but occasionally pops up.  China still rages on.  The most important thing to note here is that through all that turmoil US stocks continued to go up, albeit in a muted way.  The US economy also continued to grow, but it too has slowed down.  The trade war with China has, in fact really disrupted global trade stunting global economic expansion.  Back to the UK which has been, and most likely, is still on the verge of crashing out of the EU which no trade deal.  All of the fuss is over the border between Northern Ireland, part of the UK, and Ireland, which is part of the EU.  The border is a hot topic due to the political history that plagued the island.  So now, Boris Johnson has a proposed pact on how to deal with that border, which he must get Parliamentary approval for.  If he doesn’t, he will be forced by law to ask the EU for another delay, which they have said would not be available.  London bookmakers would put the mathematical odds against a yes vote.  What should stock traders do?  If history is any indicator of how markets will react; keeping calm seems like the right thing to do.

 

2. Give me shelter.  The housing market has had an interesting year in wake of a somewhat tumultuous 2018.  After peaking in late 2017, home sales fell throughout 2018 as interest rates were on the rise. This hampered mortgage seekers with the economy beginning to show some signs of slowing.  Enter the Federal Reserve promising lower rates and things turned on a dime.  New home sales rose almost +30% by June of this year, though it wasn’t exactly straight up.  Yesterday, the US Census Bureau released its Housing Startsnumber which showed a decline of -9.4% month over compared to last month’s growth of +15.1%.  Homebuilding stocks have risen by around +60% this year.  Could this mean that the solid year for housing and homebuilding stocks is over?  Probably not as conditions continue to favor growth.  Building Permitswhich is a leading indicator to construction (for obvious reasons) recently hit a 12-year high.  Interest rates remain low and are expected to go even lower with an 85% chance of a -25 basis point cut later this month, good conditions for builders to continue to develop.  The big question that remains is: will buyers continue to buy?  We will get some clues into that next week with the releases of Existing Home Sales and New Home Sales.  Stay tuned.

 

THE MARKETS

 

Stocks traded up yesterday on upbeat earnings, positive progress on Brexit, and a ceasefire in Syria.  Misses on housing numbers and industrial production were largely ignored, because investors like earnings beats.  The S&P500 climbed by +0.28%, the Dow Jones Industrial Average rose by +0.09% (lagging because of an IBM miss), the Russell 2000 popped by +1.10%, and the NASDAQ Composite Index traded up by +0.40%.  Bonds pulled back slightly and 10-year treasury yields climbed by +2 basis points to 1.75%.

 

WHAT’S NXT

 

–  The Conference Board’s Leading Index is expected to show flat growth for a second month in a row.

–  Dallas Fed President Robert Kaplan, Kansas City Fed’s Esther George, and Fed Vice Chairman Richard Clarida will all speak today.

– This morning Schlumberger and American Express beat earnings and Coca-Cola missed Wall Street estimates.

–  Next week, earnings season will be in full bore and we will get some regional Fed indices, more housing numbers, Durable Goods Orders, and Markit Manufacturing and Services PMI’s.  Check back for details.

 

Have a great weekend!

daily chartbook 2019-10-18