When bad news is bad news

A confluence of events makes the financial markets susceptible to further declines. It won’t be the end of the world, but it might feel like it. The volatility could drag on for several weeks or even months. So suck it up and sit tight. This week the markets did exactly what we predicted: up on Monday, ( in what I call a “dead cat bounce” ), followed by two days of indecision, and then down again Thursday. I expect that kind of pattern to prevail as we enter a period where bad news is bad news. You could say investors are facing a “perfect storm” that will blow us hither and yon throughout the next month or two. Let’s review the forecast. Have you noticed that since the Trump Election, no matter how bad the news, or outrageous the comments from the White House, the markets continued to rise? Essentially, the markets climbed this wall of worry making new highs, after historical new highs. Despite North Korea, the failure of healthcare legislation, the postponement of tax reform (now only a tax cut), delays in infrastructure spending, the slow to no building of the “Great Wall,” and so on and so on, the market’s cup remained half full. That changed this week. Readers are aware that I never believed in the “Trump Rally.” But I did believe in a growing economy, declining unemployment, stronger earnings, and a Fed that remained in a moderate mood. Once again, we witnessed strong earnings growth in the second quarter with the S&P 500 index of companies reporting on average 10.2% gains. Sales growth was...

Markets were overdue for a pullback

It should come as no surprise that the equity markets were down this week. For many, the next few weeks will be uncomfortable, but sit tight. Markets will come back and prices will be higher again by the fall. My regular readers know the drill. I have been warning you that a pullback in the 5-7% range was overdue. Last week, I explained that August through September “The danger zone,” was a seasonal period of the year where stocks usually perform poorly. I also said that, “If we were to have a pullback, look for something out of left field such as North Korea as a trigger.” That is exactly what happened. Yesterday’s column (which you can read on my blog: www.afewdollarsmore.com) reviews this week’s Korean controversy and my opinion on how to solve it. Look for continued volatility in the markets as the rhetoric war continues to heat up. Do I really think that a shooting war is around the corner? Doubtful. Of course, anything can happen, given the lead players in this drama, but I have faith that cooler heads will prevail. Nonetheless, the show provides the market an opportunity to work off some of the overbought conditions that have been building for weeks. Cheer up because the last thing we needed was a “melt-up.” That is a condition where fundamentals remain the same, but investors stampede into the stock market fearing that they will miss out on further gains. It usually signifies a “top” followed by a double-digit decline. Give me a modest sell-off instead, followed by a few weeks of consolidation and I’m a happy...

The danger zone

The market has entered the most dangerous part of the year for equities. Some of the worst market drops have taken place over August and September. After enjoying the longest streak in 22 years, without as much as a 3% pullback, the stock market is vulnerable to a downdraft. Market pundits call it “seasonality” and sometimes it works and sometimes it doesn’t. There are other months in the year when the markets are usually up. On the positive side, think of the “Santa Claus Rally,” where December and January are usually great months for the market. August has been one of the worst months of the year. In the last four years, it has been down half the time. For some reason, bad news seems to cling to August like fleas on a dog. The “Asian Contagion,” as well as the demise of Long-Term Capital Management back in the late Nineties (1997-1998), torpedoed the markets in August. In 2010, it was worries over a perceived weakness in the global economy. China was the culprit in 2015, and the U.S. debt downgrade sank the markets in August of 2011. When August is down, it is usually down big but it recovers quickly. If a downdraft were to occur this year over the next two months, I suspect it would be in the 5-6% range. That is nothing that should concern long-term investors. Looking back in history from a long-term perspective say from 1980 to last year, August’s average return was -0.1%, while September’s return was -0.7%. No big deal. If we were to have a pullback, look for something out...

Volatility returns to the markets

It has been a “sell on the news” earnings season so far. Corporate results continue to beat earnings forecast, but most stocks have been either sold after the announcements or, at most, mark time. What does that say about the direction of the markets? Granted, you can’t read a whole lot into this week’s actions. We have had plenty of one-day pullbacks in the averages. Thursday’s dip (met by buying) could have only been one more. Once again, technology took it on the chin, but that is to be expected since tech has been leading the market, hitting new all-time highs on almost a daily basis. As I said last week, “expect a pullback sometime soon.” Right now, I am looking at 2,455 as a support level for the S&P 500 Index. If we remain above that level, then it is business as usual in this bull market; below that, and the story changes. Aside from earnings, which are still coming in at the predicted 75% “beat” rate (such a scam), the shenanigans in Washington have reached a level that the noise is beginning to spill over into the market. The Senate healthcare votes are a case in point. After a seven-year tirade over the failings of Obamacare, Republicans could hardly muster the votes to even discuss its repeal.  Despite a President who has been throwing a tweet tantrum over killing the Affordable Care Act on a daily basis, the Republican majority in the Senate could not even muster the votes to repeal even parts of the ACA. I, for one, say “hurrah,” since I have long been a...

Earnings keep stocks afloat

One week into second quarter earnings, the S&P 500 Index of companies are growing at 8.6%. Earnings “beats” are in line with past quarters with almost 75% of companies beating both earnings and sales estimates. Stocks haven’t really gained as a result, but; they haven’t gone down either. Recall that money-center banks reported great earnings last week, but it was a classic “sell-on-the-news” moment. Financials fell as traders took profits in the group.   Individual stocks in most sectors have responded in the same way this week.  Of course, there are always exceptions to the rule (Netflix for one, up 14% in one day), but the profit-taking has not been enough to send the averages appreciably lower. As I wrote last week, we are officially in no-man’s land where, in order for markets to gain any traction, we need a spate of new unexpected news. That’s a tall order as we enter August-September; traditionally slow months worldwide for financial markets. The most important story this week has been the continued decline in the U.S. dollar. It has reached a two-year low against the Euro, which is now trading at 116 Euros to the dollar. Part of the reason for the fall is the expectation that the European Community’s economic prospects are getting stronger. Yet, inflation, like elsewhere in the world, is still below the European Central Bank’s (ECB) targeted rate. As a result, the ECB has delayed the decision to wind down their bond buying program, which has been in place for the last few years. This follows a similar decision by the Bank of Japan earlier in the week....

Game time for the markets

  It is earnings season once again. Banks kick off second quarter earnings today; so far, so good. Right now, investors are thinking that where the financials go, on a short-term basis, so goes the markets. The financial sector overall has rallied 7% so far this year and it is close to yearly highs. Why are financials suddenly key to the future? A lot of that has to do with the Fed. Two weeks ago, the Fed gave the green light to most of the large, money-center banks to pay dividends and buy-back their stock after the group successfully passed the central bank’s latest “stress test.” The sector gained about 3% on the news. This week, Janet Yellen, the Chair of the Federal Reserve Bank, testified twice during its semi-annual monetary policy report to Congress. The message was clearly slow-as-she-goes; moderate rate hikes, growing economy, and subdued (maybe too subdued) inflation. In short, a goldilocks picture of the U.S. economy. Stocks rallied worldwide largely on her statements. Now, the hope is that banks will profit by the rise in interest rates. Earnings will grow, bad loans will shrink, and after years and years of ho-hum profit growth, financials will shine once again. These quarterly results were supposed to give us a taste of the future for financials. Although the first few earnings reports have exceeded Street expectations, we have seen a classic “sell on the news” reaction from traders. Three of these money-center banks are all down 1-2% Friday morning. At the same time, the overall market is once again at the top of its trading range. The S&P...