Mid-term elections and the markets

Next week, voters go to the polls. If history is any guide, Democrats should re-gain control of the House. The Senate, by all indications, will remain firmly in Republican hands. Does the market really care? In the very short-term, maybe, but as the year progresses, not so much. As I have written many times in the recent past, investors applaud a do-nothing congress. When the House is divided, it is rare that any new legislation is passed. That removes the government from the risk/reward equation. The markets can focus instead on fundamentals—things like earnings, the economy and interest rates. No matter how much noise comes out of the White House and partisan politicians in the legislature, investors know that the chances of any meaningful passage of legislation will have to wait until 2020 and beyond. If that is what fortune awaits us on November 6, what then should you be focusing on? Well, unemployment (or the lack thereof) is one thing I would watch. The figures for October were just announced and payrolls increased by 250,000 jobs, leaving the unemployment rate at 3.7%, the lowest in four decades or so. What is even more important was the increase in wages growth. At 0.2 %, wage gains have hit my magic number for the trailing 12-month period of 3.1%. That is both good and bad. It is good for American workers, whose wage growth is getting back to an acceptable historical trend. But, as I have cautioned before, 3% is where the Fed starts watching those numbers closely for hints of future inflation. That could be a negative for the...

Markets remain range-bound

It’s the same old song. It has been playing over and over since the end of January. Higher interest rates, a stronger dollar, and, of course, the inevitable and meaningless stream of tweets from our Tweeter-in-Chief are keeping stocks range-bound. How long will this condition persist? Both the Dow Jones Industrial Average and the S&P 500 Index have now posted their longest consolidation since 1984. The two indexes have been in correction territory for 113 trading days. That is a longer stretch than we have seen in decades—including the period of the 2008 Financial Crisis. In 1984, it took the S&P 500 Index 122 days to emerge from the swamp, while the Dow required 123 days to do it. Only two of the last 20 corrections lasted for more than 100 trading sessions. The average correction length since the inception of the S&P 500 Index is 51 trading days. The absolute longest period was 229 trading days, which happened in 1978. So what? The 2,810 level on the S&P 500 Index is providing strong resistance to the bulls, while the 2,700 level has been hard to break on the downside for the bears. The historical 12-month high for the index is 2,872.87. That’s a mere 2.5% from here. So all-in-all, investors have nothing to complain about. We are up about 4% year-to-date–not bad, given the remarkable performance of last year. Remember, we had little to no pullbacks in 2017. The average’s 20%-plus gain was an almost straight-up phenomenon And that, my dear reader, was abnormal. A reasonable investor would expect to see at least half of that gain back,...

Trump’s trade war

Over the weekend, the G-7 group of nations met to denounce the recent actions of the United States. This coming Friday, these same leaders convene in Quebec. President Trump will attend and seems determined to face them down. Ever since the Trump Administration announced plans to raise tariffs on imported steel and aluminum by 25% and 10% respectively, our allies have been livid. Some are referring to the upcoming meeting as the G-6, plus the United States. You’ve got to hand it to the president, he doesn’t back off, but given the circumstances, maybe he should. I doubt that anyone in this country believes the present trade agreements we have signed throughout the years are even remotely fair. They should be renegotiated, but there are different ways of going about it. Unfortunately, Trump used a rather “trumped-up” excuse for his actions by claiming “national security” as justification for the tariffs. Given that the tariffs will be levied principally against America’s strongest allies, is it any wonder that the G-7’s response was what it was? They rightfully believe that the Trump Administration’s blatant attempt to circumvent the World Trade Organization (WTO) is illegal. As an example, Canadian Prime Minister, Justin Trudeau, responded to the claim by saying that “Canadians have served alongside Americans in two world wars and in Korea. From the beaches of Normandy to the mountains of Afghanistan, we have fought and died together.” “Canada,” he claims, “has treated our Agricultural business and farmers very poorly for a very long period of time.” How that squares with national security is anyone’s guess. My point is why confuse the...

Another week of market volatility

As the month wound down, so did stocks. Pronouncements from Washington dominated the market’s direction on a daily basis. We can expect to see that trend continue as the summer doldrums reduce liquidity and exaggerate market swings. The adage of “sell in May,” however, did not fulfill the bears’ expectations this year. Actually, the month of May has been pretty good for stocks recently. The S&P 500 Benchmark Index gained a smidge over two percent for the month this year. That’s not to say those gains were easy. The stress level for those who are trying to trade this market is through the roof. And that’s because two opposing trends are impacting the financial markets. The first is short-term volatility caused by political events. At the moment, these are mostly trade-related: tariffs and counter-tariffs, NAFTA concerns, and China trade. All of the above have generated a war of words (or tweets) and, depending on someone’s mood in the morning, can spark 1-2% movements in the index in either direction. The falsehoods, about-turns, and misinformation have day traders going crazy. And don’t forget the international events. This week, Italy dominated trade, as a political/financial crisis may be brewing in Europe’s fourth largest economy. A new prime minster, Guiseppe Conte, was appointed Friday as an uneasy coalition of populists and right-wingers agreed to compromise in the wake of a severe financial downturn in Italian financial markets this week. We will wait for future developments (see my column published yesterday on the subject) before giving the green light to Italy and Europe. At the same time, the Trump/Kim show continues. The off...

Markets catch their breath

It was one of those weeks where stock market indexes needed a pause before marching higher. The pullback was orderly and shallow, which is just what the bulls like to see, if the markets are going to move higher from here. The culprits (if you are looking for catalysts for this week’s minor declines) were interest rates (the ten-year bond reached 3.10%), temper tantrums out of Kim Jong Un (peace talks canceled with South Korea) and higher oil prices (renewed U.S. sanctions against Iran). A stronger dollar could also be added to the list, since the greenback’s recent gains are bad for exports. However, these are all short-term worries and could rapidly disappear in the weeks ahead. The rise in interest rates have the markets spooked. The Ten-Year Treasury bond is at its highest level since 2011. That alone is cause enough for concern among two-thirds of Wall Street. These players are so young that this is the first time they have confronted a rising interest rate environment. The same could be said for those who trade currencies. Since historically, rising rates meant a stronger dollar and weaker stock markets, why not ump on the band wagon now and sell? And so, for a week or two, traders will play that game before something else diverts their attention. For anyone who has lived through past rising rate cycles, this is simply the first inning in a nine-year game. We know that rising rates are initially good for stocks. It will be a year or two before interest rates reach a level that could curtail growth in the overall economy....

The Trump trade bluff

This week, our fearless leader upped the ante on the tariff tiff with China. It went like this: Trump announced his list. China announced theirs. And at the end of the week, the president sees them one better. Aside from the volatility it is causing in the stock markets, not much besides headlines has been accomplished. Are you seeing the pattern yet? Think back to Trump’s school yard diplomacy with Kim Jong-un, the leader of North Korea. First, a furious exchange of tweets and name-calling between the two. That was followed by saber-rattling on both sides. More test missiles. Naval ships steaming toward the Peninsula. The media spent days explaining the “what ifs” while stocks went up and down. In the end, the two neighborhood bullies now appear willing to play nice and meet at the end of the month. I fully expect our president to come out of the meeting extolling “Fatty the Third” as his newest and dearest best friend. Now compare that to the tariff turmoil. Tweets, counter tweets, threats, etc. are flying this way and that; but so far, it’s all smoke and mirrors. Investors here in the U.S. are still reacting like puppets on a string, but elsewhere governments and stock markets are disengaging from these Trump tactics. Take Thursday night’s announcement. Trump ordered his trade rep, Robert Lighthizer, to “consider” an additional $100 billion in trade tariffs against China. By the time he does all that studying, a few months will have passed. In the meantime, things change and there is no guarantee that any recommendations will ever see the light of day....