Markets held hostage by trade and machines

If it were not for computer-driven trading, it might actually be funny. Financial markets are careening up and down on a daily basis based on the next tweet or comment from the Trump Administration or its counterparts in China. We could see more of the same next week. Rhyme or reason has truly left the station. Day by day, the trade war of words is accelerating. This week, the U.S. banned China’s largest technology company, Huawei, from doing business with American companies. The president accused the company of espionage. The Chinese responded by threatening to drop trade negotiations. Markets collapsed, led by semi-conductor and technology stocks. A day later, the administration walked back their ban, at least temporarily, once they realized the entire U.S. semiconductor industry would be crippled by their move. Markets spiked higher. Then, Stephen Mnuchen, the U.S. Treasury Secretary, admitted there was no planned dates to resume trade talks– pow, markets fell again. Thursday, the President, in a free-wheeling news conference, announced a trade deal with China will happen “fast.” Confused investors jumped back into the markets chasing stocks up on Friday morning and down in the afternoon. Over in China, there also appears to be an escalation in the tariff/trade verbiage. The Chinese government-controlled media have stepped up its anti-U.S. rhetoric, quoting Chinese officials, who are increasingly painting America and its leaders as irrational and unreasonable. A protest song of sorts has hit their air and internet waves, gaining massive popularity among the billions of Chinese citizens. Rather than caving-in to our demands, it appears that China is hardening its stance and intensifying its “Made...

Markets sell in May

  The old adage “sell in May and go away” seems to be working this year. In short order all three averages experienced a down draft over the past few days that amounted to about a 5% decline in total. Is there more to go on the downside? If I were a betting man, I would say the odds are in favor of more declines in the weeks ahead. I base that bet on the assumption that it will take at least until the end of June before we get anymore clarity on whether or not President Trump is willing and able to salvage a trade deal with China. By now, most readers are aware that there has been an abrupt change in expectations on whether or not the tariff trade wars will end anytime soon. Both countries have escalated their rhetoric and at the same time made clear that more tariffs are in the works unless a resolution can be successfully negotiated. There is a G-20 meeting coming up at the end of June. Reports are that President Trump and his Chinese counterpart, Xi Jinping, will meet at that time. Until then, investors can expect this war of words to continue. Traders will be cocked and ready to pull the trigger on every tweet, comment, or action by either side. I expect markets to respond (up or down) with a vengeance. At the same time, expect to read and hear how tariffs are bad for worldwide economic growth. The bears will begin warning that Trump’s actions towards China will cause the U.S. economy to tip into recession next...

Tariffs trash stocks

Volatility in the form of U.S. trade tariffs levied on China cut through investors’ complacency with a vengeance this week. It took less than three days to drop the markets by 3%. Is it over or do we have another 5% or so to endure? My bet is that it is over—for now. Sometime during the on-going trade negotiations occurring in Washington today and tomorrow, the thorny trade issues, (such as intellectual property (IP) protection for U.S. companies) will be kicked down the road. A compromise on other, easier issues will be announced as “on-going” (although not inked) and the Chinese delegation will fly home in an atmosphere of reconciliation. From the President’s perspective, China, after agreeing to a list of breakthroughs in the trade negotiations in Peking two weeks ago, “broke the deal.” Over a half dozen important “firsts” involving IP rights, as well as other structural rules and regulations that have hampered U.S. companies doing business in China, were first agreed to as of two weeks ago. A week later, half of them had been deleted from the formal draft agreement sent to Treasury Secretary Steven Mnuchin and Chief Trade Negotiator Robert Lighthizer. The move surprised the negotiators and infuriated the President. Sunday night, the President took to Twitter and threatened to raise U.S. tariffs on $200 billion of Chinese goods from 10% to 25%. The tariffs took effect Friday morning. The Chinese have responded by preparing their own additional tariffs on U.S. goods. As you might imagine, the Dow dropped 500 points or more on Monday, spiking higher on Tuesday, down again Thursday, and by Friday...

New highs beget new highs

Some people believe we are in a “melt-up.” It is where the simple weight of money pouring into the U.S. stock market continues to carry stocks ever higher. Whether that qualifies as an investment thesis, or simply a lame excuse to justify record highs, it matters little to the bulls. It is true that this past week, we actually witnessed a rare event—a two-day, 50-point drop in the S&P 500 Index—before stocks recovered. But good news on Friday morning (job gains in the economy came in at 236,000) cheered investors. It was largely a goldilocks report where wage gains (considered inflationary) were flat for the month, bringing the the average hourly earnings rate up to 3.2% year-over-year. Overall, the official U.S. unemployment rate is now 3.6%, which is the lowest level since 1969. It brings the total number of monthly job gains to 103 in a row, which has never happened before. Given that it is also the best start in the year for stocks since 1987, is there any wonder that exuberance is the prevailing mood on Wall Street (and in the White House)? Even the bears, whose numbers are expanding by the way, admit that if we did suffer a correction, it would be, at most, shallow and sharp. That’s the kind of correction you want, if and when it occurs. I have been reporting faithfully each week the bullish rise in investor sentiment and, although it remains flattish at 55.7% bulls, it is still quite high. Earnings season, which is 80% complete, turned out to be better than expected in the minds of most investors. And...

The economy powers ahead

The first print of the nation’s Gross Domestic Product for the first quarter of the year came in at 3.2%, versus 2.5% expected. That was a big beat and justifies the market’s gains over the last three months. If you couple this with the quarter’s earnings results, which have been stronger than expected, you have the ingredients for a goldilocks economy and strong stock market. “If the numbers were so good,” asked a client, “then why didn’t the markets react more positively to the news? Well, one reason may be that the data provided a past view of the economy and financial market usually look at (and discount) future expectations. But the numbers do have some value. For example, it should put to rest the worries that a recession is just around the corner. Remember all the anxiety the inverted yield curve created just a few short weeks ago? As I advised at the time, ignore it, because even if it did predict a recession, it would be 1-2 years into the future. Another issue is the historical levels that the markets have achieved this week. As I predicted, the S&P 500 Index hit and surpassed its all-time closing high. NASDAQ did as well. Usually, when milestones such as these are achieved, markets at least pause, if not pull back, before trying to achieve further gains. So, while GDP was a blow out number, the markets had already discounted it. What then, would markets need to see in order to forge through the old highs? A trade deal between the U.S. and China would help. That wish may come...

Investors reach for new highs

The stock market won’t quit. It has been on a tear since the day after Christmas. It feels like it wants to keep climbing. That would be a fairly simple feat at this point, since we are only a percent or so away from regaining those historical highs. What will happen once we get there.? You may ask why am I so confident that the markets won’t just give up the ghost right here, right now? A look under the hood at the underlying sectors that make up the market indices gives me a clue. Let’s take the semiconductor sector. Throughout the last year or more, semiconductors, a sub-segment of the technology area of the market, have led stocks higher (and lower) time and time again. Semiconductors made a new all-time high this week. That usually precedes a similar move in the major indices. In the case of the NASDAQ, we are within spitting distance of the old highs. Other sectors, such as the Transportation Index—trains, planes, railroads, etc.—is nowhere near their historical highs, but that’s not unusual. Another positive indicator is that just about all sectors are participating in this rally. The same is true overseas, where even the weak sister of the world, the Eurozone, is witnessing good gains within the European stock markets. Over the last month, as readers are aware, I have repeatedly cautioned that somewhere out there lurks an expected pullback. Remember, we should expect 2-3 such pullbacks in the stock market each year at a minimum. It is the price of doing business in the stock market. A decline of as much as...