HIGHLIGHTS

• US stocks managed a small advance, but international equities fell.
• Worries about the global economy and trade talks hurt the market.
• Growth forecasts in Europe and the UK are revised down.
• Jinping and Trump won’t meet this month.
• Stocks cannot break through the 200-day moving average.

MARKET RECAP

A rally in the final 10-minutes of the Friday session helped the US markets eke out 0.17% gain for the week. Stocks were up on Monday and Tuesday, flat on Wednesday and weak on Thursday and Friday on worries about the global economy and trade talks between the US and China. International stocks fell by 1.18%.

On Thursday, the European Commission lowered its growth forecasts for Germany, Italy, and the Netherlands. Overall, the European Union GDP is now forecast to grow by 1.5% in 2019, down from 1.9% in the prior forecast. The Bank of England cut growth forecasts to 1.2% for 2019, down from 1.7%, and warned that a no-deal Brexit could cause a recession.

Markets were also disappointed when Trump said he would not be meeting with Chinese President Xi Jinping until March. A meeting between the two would signal that an agreement was close at hand. White House economic adviser Larry Kudlow said that an agreement between the two countries is still “far away.”

From a technical perspective, the market appears to have lost near-term momentum. The S&P 500 closed just under the 200-day moving average on Monday and Tuesday but failed to crack it, falling back on Wednesday, Thursday and Friday. Another negative sign for stocks was the out-performance this week by the defensive groups like utilities and REITs as interest rates fell.

ECONOMY

While the US did have a positive bounce last month in the purchasing manager’s index, the trend around the world continues to be down. China is already in contractionary territory and the rest of the world is not far behind.

The ISM Non-Manufacturing Index in the US also declined in January, although the absolute number was still strong. The index declined to 56.7 from 58. New export orders took the biggest hit, dropping to 50.5 from 59.5, more proof of a slowing global economy.

Given the continuing decline in economies around the world, it will become more difficult for recent growth in the US to continue.

A possible early sign of a slowing US economy is light vehicle sales, which fell by 5.1% in January to an annual rate of 16.6 million, the lowest level since August of 2017. Severe weather in the Midwest is getting some of the blame. Year over year, there was a 3% decline.

Jobless claims fell last week to 234,000, down from the big increase the previous week to 253,000.

SCOREBOARD

Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

HIGHLIGHTS

• US stocks fall slightly.
• The S&P is up by 13.34% since the December 24th low.
• The government reopens for at least three weeks.
• Tax proposals by the Democratic left.
• More chaos in Venezuela.
• The LEI declines.
• Jobless claims hit the lowest level since 1969.

MARKET RECAP

US stocks fell slightly, down 0.13%, while international equities were up by 0.54%. Bonds advanced by 0.31%.

ONE MONTH LATER

It has been one month since the market low on December 24th. At that point, the S&P 500 had fallen by over 15% during a 14-day period. A descent of 15% or more over a 14-day period had happened 7 other times since 1970. In all but one of those cases, the market had a nice rally in the subsequent one-month period. In this instance, the S&P finished up by 13.34%, which ranks second on the list.

GOVERNMENT REOPENED

The government shutdown ended as Trump and congressional leaders reached a deal to reopen the government for three weeks. Trump did not get any of the funding for the wall that he demanded.

TAX PROPOSALS…

In recent weeks proposals for tax increases from the far left of the Democratic party have been picking up steam. First, Alexandria Ocasio-Cortez (AOC) put a 70% marginal tax rate on the table and now Elizabeth Warren has come out in favor of a wealth tax. 70% marginal rates were the standard in the 60s and 70s. Of course, the tax code was taken advantage via loopholes and tax shelters to make sure that essentially no one came close to paying that. The entire idea behind lowering rates in the Reagan era (80s) was to simplify the tax code and take away incentives that did not make economic sense. That set off a long period of positive growth. But if anyone thinks the 70s are the economic period to emulate they need to look again. That is not to say we don’t need some tax increases and tax reform. We do. But ideas like a wealth tax are what one might expect from countries like Venezuela…

VENEZUELA

Speaking of, Venezuela continues to spiral out of control. The opposition leader, Juan Guaido, declared himself president. The military said it still supports current president, Nicolas Maduro. Street protests demanding Maduro’s resignation are constant and nationwide. Years of hardcore socialism from Chavez and Maduro have turned the country into a complete, economic and social disaster.

LEI

The Conference Board Leading Economic Index fell by 0.1% to 111.7 in December. “The US LEI declined slightly in December and the recent moderation in the LEI suggests that the US economic growth rate may slow down this year,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2 percent growth by the end of 2019.”

JOBLESS CLAIMS

Incredibly, initial claims for unemployment insurance dropped 13,000 last week to 199,000, the lowest level since November 1969. The previous week was revised down by 1,000 to 212,000 claims. The four-week average of claims fell 5,500 to 215,000, also near its lowest level since 1969, as labor market conditions remained tight.

SCOREBOARD

Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

HIGHLIGHTS

• Stocks are up again, +2.87% in the US and 1.97% x-USA.
• It is still early, but earnings reports have been positive, sales have been mixed.
• Economic reports slightly on the negative side.
• Investment legend Jack Bogle passes.

MARKET RECAP

US stocks fell slightly on Monday, and then rallied the remainder of the week to finish up by 2.87%. International equities advanced by 1.97%. Bonds fell by 0.19%. The S&P 500 is off to its 6th best start of all-time at +6.5%. Small-cap stocks are up by 10.03%. Since the low on December 24th, the S&P is up by 13.6%.

Stocks were helped by progress on trade talks between the US and China and by earnings reports. It is still very early in the earnings season, 69% of companies have reported earnings higher than the consensus and 49% have beaten sales estimates. Companies that have reported have generally had a favorable reaction in the market. This is the opposite of last quarter, where even positive reports were often ignored or sold on. However, guidance going forward has been more negative than positive.

ECONOMY

There was actually a positive report this week. The Philly Fed General Business Activity Index hit a three-month high, up by 7.9 points to 17.0. New orders increased at the fastest rate in six months. But managers were less certain about orders going forward. However, the Empire Manufacturing report came in much less than the estimate, 3.9 versus 10.0 and down from 10.9. Overall last week, economic indicators slightly missed projections.

The labor market remains very strong. Jobless claims came in at 213,000, that is near historical lows.

The news was worse in China. Imports and exports are falling. Imports were down by 7.6%.

JACK BOGLE

Investment legend Jack Bogle passed this week. Jack was the founder of Vanguard and essentially invented the index fund. His efforts at reducing costs and making investing more efficient have saved investors billions. His common-sense approach to investing inspired legions of followers and it can be said that he, more than anyone else, has single-handily changed the way people invest.

SCOREBOARD

Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

This is a holiday-shortened commentary. We wish everyone a Happy New Year! Please feel free to contact us with any questions or comments. 

MARKET RECAP

You didn’t have to visit Disney to go on one world-class roller coaster ride this week. The chart below from Marketwatch says it all. Stocks got off to a terrible start to the week on Monday, dropping by 2.7%. Trading resumed on Wednesday, after Christmas, with the biggest one day climb in terms of points for the Dow, over 1,000 (but not in terms of percentages). Thursday started down and ended with another monumental comeback. And on Friday, stocks were mixed. But for the week, US equities were up by just under 3% and international stocks by just under 2%.

The technical action looked good from Wednesday on. And it was similar to what we have seen at the low point of other market downturns. But three days is not nearly enough to say that a bottom is in, and it might just be a fake out.

Where we go from here will be impacted by political decisions in Washington. To give the economy and the markets a fighting chance we have to avoid a fumble by the Trump administration, especially regarding the trade war in China and the government shutdown. We want global markets that will grow, not contract. The Fed will have to do its part and keep interest rates in line with how the economy is responding.

There was some good economic news this past week in the US. The preliminary retail reports showed a strong holiday season.

SCOREBOARD

Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

HIGHLIGHTS

• Markets fall by 7.23% in the US.
• Fed increases rates by 1/4 point and indicate two more hikes next year.
• Government shutdown begins.
• Defense Secretary Jim Mattis resigns.
• There is extreme negative sentiment in the market.
• FedEx CEO comments on the worldwide slowdown.
• The end of quantitative easing.
• Oil is down 40% since October.

MARKET RECAP

Stocks got slaughtered as US equities fell by 7.23%. It was the worst week since 2008. The NASDAQ, which fell 8.4%, is now off by 21% since its August 29th high. The overall market is down by 18% since its September 20th high. The Dow is setting up to have its worst December since 1931. And the consensus is that more is on the way. Unfortunately, bear markets are part of normal market behavior (although infrequent), and the excess returns equity investors receive over time are attributable to the greater risk they take on in comparison to safer assets.

The Fed got most of the blame for this week’s fall. As expected, the Fed increased rates by 1/4 point on Wednesday. But the market was hoping for a “dovish” increase. That is supposed to mean the Fed would increase rates by 1/4 point, and then state that further increases would be dependent upon the data. Powell’s comments were interpreted as too hawkish, as he indicated another couple of hikes were in the current plans and there would be no slowdown in the roll off of the Fed’s balance sheet. To the Fed, the economy in the US continues to look solid.

The market might have taken a hit no matter what Powell said, after all, the market was down by 2% on Monday alone and had been falling prior to that. The Fed even backtracked on Friday, when John Williams, President of the Fed of New York, said that the central bank was closely watching the economy. Williams stated “[we are] listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views.” That led to a big Friday rally that sent the Dow up by 350 points early, but the market couldn’t hold the gains and stocks ended down by 2.12%.

But there was more than enough other negative news to give the market a reason to decline. The government went into a shutdown mode on Friday as the White House and Congress could not agree on funding for the wall along the border with Mexico. Trump made an abrupt decision to draw down troops in Syria and Afghanistan, leading to the resignation of Defense Secretary Jim Mattis. Mattis becomes the latest in a long line of respected members of the White House team to leave. Early on in this administration, those fearful of Trump’s worst tendencies were told he was surrounded by a very competent team, but that argument is basically null and void at this point. Are there any “adults” left in the White House?

If there is any glimmer of hope it might be in the fact that everything is so negative. The last interim high on the S&P 500 was on 12/3/2018. In the 13-trading days since then, the index has fallen by 13.4%. An extraordinary drop in a short period of time. We found 8 other times since 1970 when the index has fallen by 13% or more in 13-trading days. Looking forward 1-year (see the right-hand column below), the market was up seven of eight times. We are not making a call on that, but pointing out what has happened in the past.

The CBOE Options Total Put/Call ratio reached its all-time high on Thursday of 1.82 (the calculation began in 1995). This indicates extreme negative sentiment as traders are buying lots of insurance (puts) to protect against further market declines. Below are the results when the reading has been above 1.50 going back to 1995.

FEDEX

FedEx can be viewed as a good bellwether on the world economy. On the earnings call, the company indicated that overseas economies are slowing down while the US still remains in good shape. FedEx mentioned the UK and Europe were in sharp slowdowns. FedEx sited bad economic choices as the primary reason for economic weakness, including Brexit, the immigration crisis in Germany, mercantilism and state-owned initiatives in China, and tariffs in the US.

CENTRAL BANK PURCHASES

One factor impacting markets is the end of quantitative easing around the world. Central banks are no longer pumping money into economies worldwide. The US stopped in October of 2017, and since then has been doing the opposite, effectively taking money out of the system as they let bonds mature without reinvesting the funds. Meanwhile, the European Central Bank will end its money-printing program at the end of this month, however, they will continue to reinvest the proceeds as bonds mature. Japan’s program remains in place. But overall, the net impact will turn negative by year-end.

OIL

Oil dropped by 11% for the week and is down 40% since October 3rd. The dramatic fall coupled with the sell-off in stock market leads some investors to believe there is something fundamentally wrong with economies worldwide. But it might be more of a supply than a demand issue. US production was up 16% in 2018 and should be up 11% next year (according to the Department of Energy).

SCOREBOARD

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading or investment advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all-inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

MARKET RECAP

It was another bleak week on Wall Street, stocks slid by 1.32%, which sounds almost mild by recent standards, but from midday Wednesday on, stocks gave up positive gains from Monday and Tuesday. International equities fared slightly better, falling by 0.51%. And bonds were up by 0.08%. The S&P 500 closed at its lowest level since April, the index is down by 11.28% since its high on September 20th.

Economic news was weak overseas but positive in the US (see further below). News that the US might be headed for a government shutdown hurt markets. Trump wants to build his wall for $5 billion but Democrats have offered $1.3 billion. Trump says he will shut down the government until he gets funding for the wall. Trump’s former lawyer Michael Cohen was sentenced to three-years in prison and a federal investigation was opened into whether the Trump inauguration committee spent funds illegally.

The VTI (US Total Stock Market) fell just below the support line we marked last week. See the red arrow below. Indicating a higher chance of another leg down.

ECONOMY

The debate rages on if a recession is knocking at the door, as in the next year or so. Outside the US, economies have been on stall speed for a while and might be getting worse. China reported that industrial production had slowed to its weakest point, +5.1%, since early 2016. The growth in retail sales in China, +8.1%, fell to the lowest level in 15-years. Note the numbers in China are still positive, but slower than what they are used to.

In Europe, Italy is close to a recession and in France, anti-government protests have resulted in a drop in business activity for the first time in two years. In England, the Brexit mess is hurting economic activity.  The composite purchasing managers index for the Eurozone fell to 51.2 from 52.7, still indicating growth (greater than 50) but clearly slowing down.

The US is in better shape, but the forecast is for slower growth compared to recent quarters. The IMF projects 2.5% growth in the USA compared to 3.5% in Q3 and 4.2% in Q2. However, economic reports that came in this week were positive, and the Atlanta Fed’s GDPNow model upped its estimate of Q4 growth to 3.0% from 2.44% last week.

November retail sales beat expectations. Sales were up by 0.2% versus an expectation of 0.1%. Excluding autos and gas, sales increased by 0.5% versus 0.4%. Online sales increased by 2.3%. Gas stations fell by 2.27% on lower gasoline prices.

Industrial production increased by 0.6% in November after falling 0.2% in October. Year-over-year, industrial production was up by 3.9%.

Unemployment claims dropped for the week to 206,000, much lower than forecasts and significantly lower than the two previous weeks.

BARRON’S COVER STORY

Amidst all the gloom, Barron’s cover story is titled “Why stocks could rise more than 10%” in 2019. Based on interviews with 10 strategists, the group has an average projection of an increase of 14%. Earnings on the S&P 500 are expected to rise by 5% to $172 per share, the strategists are mildly optimistic that US and China will reach a trade deal at the beginning of the year, interest rate increases should slow, and GDP should grow by 2.5%. A primary risk to the forecast is a breakdown of talks between the US and China.

STOCK VALUATIONS DROP TO FIVE-YEAR LOWS

International equity valuations are hitting five-year lows. According to FactSet, the forward price-to-earnings ratio is now at 13.3, down from 16 earlier in the year. The price-to-free cash flow ratio is at the lowest level in six years. While these valuation ratios are falling, earnings for companies in the FactSet World Index are expected to rise by 16% over the next year. Higher interest rates might account for some of the drop in valuations, as well as worries about slowing economies around the world.

CHINA TO OPEN MARKETS

It was reported on Wednesday that China was going to adjust their industrial policy so that it becomes friendlier to foreign businesses. China would back off their policy to become the world leader in technology and manufacturing by 2025 and the country would become more open to foreign companies. Tariffs will be lowered on auto imports and China would increase their purchases of US agricultural products.

SCOREBOARD

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading or investment advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all-inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

MARKET RECAP

Well, the week got off to a good start, but it turned vicious as stocks tumbled by 4.56%. International stocks were down 3.13%. It was the worst start to a December since 2008.

Stocks rallied on Monday, up by 1.17%, on the news that at the G20 summit, the US and China had agreed to a 90-day delay in the implementation of the next set of tariffs.  Furthermore, Trump sounded very optimistic that the two countries would reach a final deal. But that ended the very next day when Trump declared that “I am a Tariff Man,” stocks fell by 3.27%. The market was closed on Wednesday due to the funeral of former President George H. W. Bush. On Thursday, it was reported that Meng Wanzhou, the chief financial officer of Huawei Technologies, a very important Chinese technology company, was arrested in Canada on a request from the US for alleged violation of Iran sanctions. Meng is also the daughter of Huawei’s founder. Stocks opened down on the news and then fell as much as 2.88% before staging a furious rally and essentially ending the day unchanged. The rally did not carry through to Friday when equities fell another 2.36%, close to the Thursday low.

If you boil it all down to one factor, investors are worried that a recession is on the way in the next year or so. But such worries do not always turn out to be true. Two recent examples, remember January of 2016 when the weak Chinese yuan and collapsing oil prices spooked investors. And the debt ceiling crisis in 2011. Neither resulted in recessions. Not to mention all the concerns about Europe earlier in this decade.

That is not to say there is no recession on the way. There are certainly signs that the economy is at least decelerating. The Atlanta Fed’s GDPNow model currently projects growth at 2.4% this quarter. 

TECHNICALS

The overall US market is now pushing dangerously close to a support level it has bounced off two other times since late October (see points 2, 4 and 6 below). On the Monday rally (point 5 below), you will see the market failed to push through resistance, same as it had previously at points 1 and 3. So if the market can hold support here, it would appear that we are in some kind of consolidation pattern between $134.60 and $144. We looked at a couple of past bear markets with a somewhat similar pattern. In 1973, stocks fell through support on the third test which led to an acceleration of the bear market. In 1981, stocks held support and consolidated for another 8 months, before continuing their downtrend. There is also the possibility that the Friday low marks the bottom of this correction. The truth is nobody knows.

At least one small signal of technical strength is that the S&P 500’s cumulative advance/decline line has been holding up, putting in two recent higher highs and higher lows (Bespoke Report 12/7/18).

YIELD CURVE

Investors also freaked out about a slight yield curve inversion between the 2 and 5-year treasury bonds. A yield curve inverts when a shorter-term bond yields more than a longer-term bond. In this case, as of the Friday close, the two-year bond yielded 2.72% and the five-year was at 2.70%. In the past, an inverted yield curve has forewarned of a recession. But economists normally compare the 2-year against the 10-year, or the 3-month against the 10-year, not the 2-year and 5-year.

In any case, what does a yield curve inversion mean for the economy and for investors? Aswath Damodaran, a Professor of Finance at New York University, after running the numbers, concludes that the “…predictive power [of an inversion] for the economy is weak and for the market, even weaker. The other thing is that we are taking rules of thumb developed in the US in the last century and assuming that they still work in a vastly different economic environment.” You can find Professor Damodaran’s commentary here.

JOBS

Job growth came in at 155,000 for November, short of the consensus of 198,000. The three-month average is now 170,000, which is the lowest number in a year. The 155k increase shows growth, but at a slower pace than we had previously seen. This is in line with other cautionary signals that the economy is decelerating, such as slightly initial claims for unemployment, declining housing activity, and a flatter yield curve.

Initial claims for unemployment insurance fell by 4,000 to 231,000. The four-week average is 228,000, the highest level since April. The trend now has turned up since September 15. However, historically the number is still very low. And this is not the first time that the trend has turned up. It has happened many times over the last few years, only to resume its downward trajectory.

PMIs

Markit released its monthly report for composite PMI data for 23 countries in November, and the numbers came in somewhat positive. Overall the report showed an increase of 0.3. Emerging markets led the gain, up by 0.6 on average, with many countries showing a 1+ gain, including India (+1.5), China (+1.4), Brazil (+1.1) and South Africa (+1.3). Developed markets did not fare as well, down by 0.1. The Eurozone was down by 0.4 and the flash report for the US fell by 0.5. Overall all, of the 23 countries, 18 were above 50, indicating they were in an expansionary mode.

ISM

The Institute for Supply Management’s Non-Manufacturing Index was also positive. The November reading came in at 60.7, the second highest level since August of 2005, indicating above-trend expansion.

TRADE DEFICIT

American companies are now paying record amounts in tariffs, as the latest round in Trump’s trade war with China has begun kicking in. Yes, we said “American companies” are paying the tariffs. Not China. Tariff collections totaled $5 billion in October. Trump loves this extra revenue, stating “We are right now taking in $billions in Tariffs. MAKE AMERICAN RICH AGAIN.”

But while revenue to the government is up, the tariffs are causing real pain to American business. The tariffs also have not helped the trade deficit, which was one of Trump’s big complaints. In fact, the trade deficit is getting larger. The US trade deficit just reached its highest level in 10-years. That is because imports have remained steady, even in the face of the tariffs, while exports have plunged.

SCOREBOARD

QUESTIONS/COMMENTS

Contact us with any questions or comments.

HIGHLIGHTS

• Stocks explode higher on dovish comments by Powell.
• Trump and Xi to meet on Saturday, with hopes that a deal can be made.
• Initial jobless claims hit a six-month high.
• GM announces job cuts.
• Economic Surprise Index has fallen to a six-month low.
• 2019 earnings projections have declined for seven straight weeks.

MARKET RECAP

The market exploded higher, US stocks surged by 4.60% and international stocks were up 2.01%. It was the best week in seven years. Stocks were helped by comments from Fed Chair Jerome Powell, and hope that President Trump and Chinese Leader Xi will reach a deal of some sort to forestall the next set of scheduled tariff rate increases. With the rally, equities were up by 1.95% for November and are now up 4.42% for the year.

Back in October, Fed Chair Jerome Powell set a hawkish tone when he said that the Fed was “a long way from neutral.” That set the perception that the Fed was dead set on a series of interest rate increases every quarter.

On Wednesday, Powell, speaking at the Economic Club of New York, shifted to a more dovish position, stating that interest rates are just “below neutral” and that there “is no preset policy path” regarding future interest rate increases. Powell went on to say that the Fed’s decisions would be based on economic data. That is just what the market wanted to hear, and equities burst higher, closing up by 2.3% on the day.

The rally was also good for the market from a technical perspective. Stocks did not put in a lower low (see the red line below) and broke through the high from the two-day rally a couple of weeks back (see the blue line). However, we would not give the all clear yet, there is still economic data out there that is mixed at best.

JOBLESS CLAIMS HIT A SIX-MONTH HIGH

It is too early to say this is the start of a trend, but, initial jobless claims came in at 234,000 this week, the highest reading in six months. Over the past several years, whenever there was a hint of a slowing economy, the fallback was that the labor market was extremely tight and that jobless claims were ridiculously low. At 234k, jobless claims are still very low historically, but the number does represent a recent high in initial unemployment claims.

GM ANNOUNCES JOB CUTS

GM announced that it will cut up to 14,800 North American jobs due to weak sedan sales. This is the first set of large job cuts since the last recession for the company. GM CEO Mary Barra said she wanted to take action ahead of the next downturn, “The industry is changing very rapidly. We think it’s appropriate to get in front of it while the business and the economy are strong.”

President Trump was not happy. He threatened to take away electric-vehicle and other subsidies that benefit GM. Those subsidies shouldn’t be there in the first place but that is another issue. Trump is of the belief that GM has an obligation not to cut jobs due to the government’s help in saving the company during the last recession. While heartbreaking, Barra is making these moves to keep the company financially secure so that they won’t have a repeat of a near-death experience the next time the auto industry falls into a major slowdown.

SURPRISE INDEX

The Citigroup Economic Surprise Index for developed markets has now fallen to a six-month low. The Index measures whether economic statistics are meeting the consensus projections. The index has been falling consistently since September.

EARNING PROJECTIONS

Stocks are selling at a reasonable valuation based on forward-looking earnings. The S&P 500 is priced at 15.67 projected 2019 earnings. The problem is that earnings projections for 2019 have now been revised lower for seven consecutive weeks. Per Refinitiv, earnings for 2019 are now projected at $176.15, down 1.53% from the high on September 7 of $178.90.

SCOREBOARD

HIGHLIGHTS

• Stocks take another hit.
• High-yield spreads are opening up, while treasury yields fall.
• The consensus is changing on interest rate hikes for 2019
• Oil is pummeled.
• Trump and Xi to meet.

MARKET RECAP

US equities were hit hard, falling by 3.53%. The S&P 500 was off by 3.83%. International stocks continued their recent relative out performance but still fell by 1.99%. US stocks are about 1.5% away from dropping through the low hit on October 29th. Equities will have to hold that level to put in the beginning of at least a consolidation process.

While yields on Treasury bonds were generally down a couple of basis points, the spread on high yield bonds continued to increase. The 10-year treasury yield is down by 10 basis points this month, but the high yield spread is up by 44 basis points. That indicates investors are backing away from debt most susceptible to a slowing economy. Bank loans and floating rate instruments have taken the brunt of the hit, a chart of the Invesco Senior Loan Portfolio (BKLN) is indicative of the damage.

FED

The consensus is rapidly shifting that the Fed will have to back off its aggressive posture of three rate hikes in 2019. The futures market has priced in just one rate increase in 2019. That would be in addition to the projected December rate hike. It looks like projected GDP growth is slowing. Both the GDPNow and the NY Fed Nowcast model have Q4 growth at about 2.5%, down from 3.5% last quarter and 4.2% in Q2.

OIL

Oil was pummeled. WTI crude dropped by 10.7% for the week and is now down 22.8% for the month and is down by 34% from its October 3 peak.

TRUMP and XI

President Trump and Chinese leader Xi will meet in Buenos Aires this week. Trump said he very prepared for his meeting, “I know every ingredient, every stat. I know it better than everybody knows it. My gut is always right…China wants to make a deal. If we can make a deal, we will.” The Chinese currency (yuan) is hanging on by a thread, without a deal, the threat rises of the yuan falling through an important psychological barrier, resulting in possible contagion throughout global markets. The selloff in January of 2016 was driven in part by fears of a falling yuan.

SCOREBOARD

HIGHLIGHTS

• US stocks fall by about 1.5% and international stocks are about flat.
• The out-of-control US deficit gets off to a terrible start in October.
• Some speculation that Fed might slow up on increases next year.
• Record amounts of Baa rated debt could be a trouble spot in an economic slowdown.
• Some weak economic numbers from Germany and Japan.

MARKET RECAP

US stocks fell by just under 1.5% for the week, while international equities continued their recent outperformance, down by just 0.06%. Treasury rates fell along the curve, but high yield spreads expanded. While the 10-year treasury dropped by 11 basis points, the high yield option-adjusted spread increased by 30 basis points, an indication that some fear is creeping into the credit markets.

Stocks were down the first three days of the week. On Thursday and Friday, the market rallied on hopes that the Fed will start to get the message that maybe they should take a more gradual approach to interest rate increases. Also, Trump said on Friday that China wanted a trade deal and that maybe an additional hike in tariffs is not needed.

US DEFICIT

The 2019 fiscal year for the Federal government got off to a terrible start in October (the first month) as the budget deficit widened to $100 billion in October. That is up from $63 billion the prior year. A massive increase that continues to be ignored but just about every politician in Washington. Federal outlays increased by 18% because of higher spending on Medicare, defense and interest. Receipts were up by 7%. The bad part is that unless this problem is dealt with, it is only getting worse from here due to increasing entitlement spending, more and more interest expense and lost revenue from the tax cuts. The idea behind the tax cuts is that greater growth would eventually lead to a net increase in revenues. That has yet to happen.

The Congressional budget office estimates the deficit will hit $1 trillion this year.

INTEREST RATES

The conventional wisdom is that the Fed will continue to increase interest rates from here over the next year. But that might be wrong. While a December increase appears to be in the cards, the Fed can signal at the December meeting that it might consider a more gradual pace to future increases given economic weakness abroad and lower commodity prices. John Lonski, Chief Economist at Moody’s Capital Research, writes that industrial metals are down by 11% year over year, and that historically, such a drop in prices has often led to a lower 10-year treasury yield. If the Fed were to persist with increases at the same time that the 10-year yield is falling, that could lead to an inversion of the yield curve, a situation they might want to avoid.

RECORD Baa Debt

There is a record amount of debt rated Baa, just above investment grade. As of Q3, there was a record high of $2.83 trillion, which exceeded the amount of single-A corporate credit. This is not usually the case, as shown below, prior to the recession in 2001 and 2008 single-A debt was greater than the amount of Baa’s. If the economy begins to falter, a good amount of the Baa’s might drop into high-yield (junk) status, that could increase interest rates in the high-yield market, leading to more problems as the weakest companies must deal with higher interest expense and refinancing issues.

WRONG TURN

The global economy took a wrong turn as Japan and Germany reported GDP that contracted in Q3. Germany dropped by 0.8% and Japan was down by 1.2%. German economists said that temporary factors caused the drop. Japan blamed the fall on a typhoon and an earthquake.  Overall, the Eurozone managed a small increase of 0.7%, the lowest reading since 2013. In comparison, China was up by 6.5% and the US by 3.5%.

But all is not well in China. China reported slower consumer spending in October. Retail sales were up by 8.6%. That would be a monstrous gain in the US, but for China, that was the slowest increase in five months.

SCOREBOARD