Week Ending 3/22/2019

HIGHLIGHTS

  • US stocks get slammed on Friday and fall by 1% for the week.
  • The 3m/10yr yield curve inverts for the first time since 2007.
  • Weak manufacturing reports in Europe and the US.
  • Slow growth in US service sector.
  • The budget deficit keeps expanding at frightening rates.
  • Brexit is delayed temporarily.
  • Trump may keep tariffs in place with China.

MARKET RECAP

What has become a tug of war between the bulls and the bears went to the bear side this week as US equities fell by 1%. A fast-moving decline in interest rates got going on Wednesday after the Fed meeting (see below) and then accelerated to the downside on Friday. That inverted the yield curve (3m/10yr) and raised recession fears. The economy has been going one way (down) while stocks have been going the other way (up) and that divergence will have to be resolved one way or the other. Hence, the tug of war. The inverted yield curve, along with a negative report on Friday that showed that factory output in the Eurozone fell at the fastest rate in almost six years, and that a gauge of US manufacturing activity dropped to its lowest level in two years, was enough for US stocks to fall 2.1% on Friday and turn what would have been an up week into a losing week.

FED / INTEREST RATES

Fed Chairman Jerome Powell made it clear that the Fed would most likely not raise interest rates this year. On Wednesday, Powell said, “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.” This is a complete reversal from as recently as December when the Fed had planned on multiple interest rate increases.

With no interest rate increases insight and a weakening economy, the yield on the 10-year bond fell by 15 basis points during the week. Yields on the German and Japanese 10-year note fell below zero percent.

The spread between the 3-month treasury bill and the 10-year bond inverted for the first time since 2007. This is a highly watched indicator that has preceded every US recession since 1975. On the other hand, the indicator has inverted at times without a subsequent recession in the near-term. Also, rates on high-yield bonds have not increased. St, Louis Fed President James Bullard said that the inversion was “mildly concerning”, hoping that the inversion was temporary. A sustained inversion would worry him much more.

As interest rates have been falling, so have mortgage rates, and that helped push sales up of previously owned homes by 11.8% in February, the largest gain since 2015 and the second biggest increase ever. However, high prices and a shortage of starter-homes remain impediments to the housing industry.

The Fed is still positive on the economy, although they did revise growth estimates downward. The central bank projects US GDP will expand 2.1% this year and 1.9% in 2020. Powell said the Fed has “a positive outlook for this year” helped by rising wages, low unemployment, and high consumer confidence. Powell did highlight risks including slowing growth in Europe and China and US trade policy.

SERVICES

The Census Bureau said on Thursday that revenues across the U.S. service sector rose by 1.2% in Q4. That was the slowest growth in five quarters and lower than expected. Economists are now projecting that the first estimate for Q4 growth of 2.6% will be revised downward. The slower than expected service revenue report follows lower numbers on construction spending. JP Morgan is estimating Q4 growth at 1.8%, Macroeconomic Advisers is at 2%, and Oxford Economics projects 1.9%.

BUDGET DEFICIT

The budget deficit just continues to get worse and worse. The gap widened by 39% for the first five months of the year as revenues remained roughly level and federal spending increased. The deficit was $544 billion from October through February, compared to $391 billion last year. Federal revenues declined by less than 1% but federal outlays increased by 9%. There were some timing differences, and taking those into account, the deficit would have expanded by 25%, still a dramatic number. Healthcare, the military, and tariff assistance programs for farmers were contributors to the increase in spending.

BREXIT

EU leaders said they would extend the Brexit deadline until May 22 if the British Parliament approves the agreement next week. If the agreement is not approved, the UK would have until April 12 to indicate how they plan to move forward. Under that scenario, the UK could ask for a longer extension, or there can be a hard Brexit in mid-April.

CHINA

Trump said that he might keep tariffs in place with China for a “substantial period of time” even if the US and China agree to a deal.

JOBLESS CLAIMS

In good news, initial jobless claims fell by 9,000 to 221,000, below the estimate of 225,000.

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 or investing 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.

Week Ending 3/15/2019

HIGHLIGHTS

  • The market reclaimed the high ground as US equities jump by 2.85% and international stocks were up by 2.79%.
  • The Fed’s neutral policy on interest rates and a stop in the decline of earnings estimates are providing a tailwind to equities.
  • Brexit mayhem continues.
  • Twelve Republicans had the guts to vote with Democrats to block Trump’s “emergency” funding of his wall. Trump vetoed the bill.

MARKET RECAP

In last week’s commentary, we wrote that the market had displayed some negative technical signals when US equities fell below the 200-day moving average and the VTI (US total stock market) had fallen back below the support (formerly resistance) line it had broken through the week before. This week, stocks reclaimed the high ground on a big Monday move, followed by advances on Tuesday, Wednesday and Friday. For the week, US stocks were up by 2.85%. International stocks increased by 2.79%. Bond rose by 0.25%.

While economic indicators have been on the slowing side, stocks now have two backdrops that are acting as tailwinds. First, the Fed’s shift from drive to neutral has put the breaks on fears of higher interest rates. Lower rates, all other things equal, increase the attractiveness of equities. Second, the constant decline in profit estimates, that has been going on since about September 7, might be coming to an end. This week, 2019 estimates dropped by only one cent to $167.93 and 2020 estimates actually went up by one cent to $188.05. All in all, since the September 7 peak, earnings estimates for 2019 have declined by 6.1%.

BREXIT

Theresa May’s proposed Brexit deal with the EU failed to be ratified by the British Parliament on Tuesday, that left four options. First, the default outcome would be a hard Brexit that would result in an almost certain severe negative economic outcome. Another option is that Brexit is further postponed, that would have to be approved by the EU. A third option would be to make adjustments to Mrs. May’s proposal before the deadline. A final option is another referendum to see if voters really want to Brexit given what they know now.

A hard Brexit will have a major impact on trade with Europe that has been developed over decades. A hard border would be reimposed with Northern Ireland.

A vote by the Parliament on Wednesday showed a majority against a hard Brexit. On Thursday, Parliament voted to delay Brexit by three months, which would need EU approval. Mrs. May will meet with the EU leaders this Thursday to discuss the terms of a postponement, which will require approval from all of the EU members.

CONGRESS VOTES TO BLOCK EMERGENCY FUNDING FOR TRUMP’S WALL

Twelve Republican Senators had the guts to vote with Democrats and block the funding for Trump’s wall. Trump vetoed the bill, and unless some Senators flip, an override does not look possible. Trump had declared a “national emergency” to secure the funding, a violation of the separation of powers, contrary to historical conservative principles, and a terrible precedent that will come back to sting the Republicans and the nation the next time the Democrats win the Presidency. It was very short-term thinking for political reasons instead of making a smart, long-term decision for the sake of the nation and the constitution. We commend the twelve Senators who did the right thing.

SCOREBOARD

Week Ending 3/8/2019

HIGHLIGHTS

  • US stocks were down by 2.38% and international stocks dropped by 1.80%.
  • Negative technical signs for US equities.
  • Only 20,000 jobs added in February.
  • Interest rate policy turns dovish worldwide.
  • The deficit is really exploding.
  • Tariff costs are being borne by US consumers.

MARKET RECAP

Stocks fell by 2.38% in the US and 1.80% x-US. Bonds advanced by 0.75%. US stocks fell below their 200-day moving average. Looking at a chart of the VTI (total stock market), last week prices broke through the resistance level set at points 1, 3, and 5 (see chart below) from the 4th quarter of last year, but this week they could not hold that level and fell back below the resistance line (see 9). That is what technicians call an “upthrust”, when a stock or fund moves above resistance and then quickly reverses and moves back below resistance. The upthrust move and dropping below the 200-day average are negative technical signs. Stocks were in an overbought condition, so a sell-off is not a big surprise, so far it has been mild. We showed a couple of weeks ago a similar set-up in 2011 to the current market when stocks dropped 10%. But the market constantly surprises so anything can happen.

PAYROLLS

Only 20,000 jobs were added in February, the weakest report since March of 2011, assuming future revisions don’t change it. There is some belief that there are errors in the data as a result of the government shutdown. Taking 20,000 as a stand alone number, the report looks weak. However, if you look at the last 2 or 3 months as an average, the numbers look healthy. The unemployment rate decreased to 3.8%. Year over year, average hourly earnings were up by 3.4%.

INTEREST RATES

In the span of just a few months central bank interest rate policy has turned dovish worldwide. The ECB downgraded its forecast for Eurozone GDP growth from 1.7% to 1.1% for 2019. They now plan to keep interest rates at current levels through the end of the year. That is longer than was originally planned. The ECB also said they would begin issuing inexpensive long-term loans in September and the program would run through March of 2021. China has also begun issuing loans to companies to promote growth. This follows the Feds announcement that they would put the breaks on interest rate increases for the time being. In a low-interest rate world, equities generally become more attractive.

DEFICIT

The US government deficit soared by 77% for the first four months of the fiscal year to $310 billion. Federal outlays were up by 9% and receipts were down by 2%. The outflow was due to higher spending on the military, veteran affairs and interest on the debt. Receipts fell because of lower corporate and individual income-tax collections. Keith Hall, Director of the non-partisan Congressional Budget Office (CBO) said: “It’s hard to imagine this is sustainable.”

Beginning in 2022, the CBO expects deficits in excess of $1 trillion and will average 4.4% of GDP, compared to 2.9% in the previous 50 years. Expect tax increases in the next few years.

TARIFFS

A study by economists has pegged the cost of the US trade tariffs to consumers at $69 billion. That counters the White House argument that the cost of the tariffs are paid for by foreign countries. Overall, combining costs and benefits, the tariffs have cost the US economy $6.4 billion. The Centre for Economic Policy study stated that “We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices.”

Tariffs have also impacted world trade, leading to a slowing global economy. Chinese exports fell by 20.7% year over year in February and auto sales dropped by 18.5%.

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.

Week Ending 3/1/2019

HIGHLIGHTS

  • Stocks were up but the Dow ended its nine-week winning streak.
  • Q4 GDP comes in better than expected at 2.60% but Q1 is looking bleak.
  • Interest rates increased during the week.

MARKET RECAP

US stocks were up by 0.45%, although the Dow Jones Industrial Average ended its nine-week winning streak, falling by 0.02%. International stocks managed a gain of 0.17%. Bonds fell by 0.47% as interest rates increased across the curve. For January and February, it was the best opening two months of a year since 1991. The S&P 500 was up by 12.07%.

GDP

The US economy grew by 2.6% in Q4, adjusting for seasonal activity. That was higher than the consensus estimate of 2.2%. Output was up 3.1% year over year, making it two quarters in a row of greater than 3% year over year growth. The White House thinks 3% growth will continue. The Federal Reserve estimates growth of 2.3% in 2019, 2.0% in 2020 and 1.8% in 2021. For the year of 2018, the economy grew by 2.9%.

The initial estimates for Q1 look weak. The Atlanta Fed’s GDPNow model has Q1 growth at 0.30% and the NY Fed’s Nowcast model is at 0.88%. Over recent quarters, the GDPNow model has trended lower as the quarter has progressed, so starting at 0.30% is not a good sign.

INTEREST RATES

The better than forecasted GDP numbers increased interest rates during the week. That, along with a Fed that has made it clear that it will be patient before increasing interest rates again might be increasing inflation expectations, resulting in higher rates. Rates on the 2-year increased by 7 basis points and on the 30-year by 11 basis points. The spread between the 10 and 2-year treasury bonds has increased to 21 basis points, the highest amount since December. That would be a positive, as the threat of a 10-year bond yielding less than a 2-year bond (an inverted yield curve) is considered a recessionary signal.

The increase in interest rates was enough to change the price trend to negative (as interest rates go up, bond prices go down) on the AGG (the aggregate bond index) for the 2-week and one-month period for the first time since November 16, 2018.

Increased talk by Democratic presidential candidates about using Modern Monetary Theory as justification for vastly widening deficits might be seeping into the pricing of interest rates. As we have written and spoken about many times, neither political party has a serious interest in getting deficits under control and now there is open talk of expanding them even more.

YELLEN ON TRUMP

Former Fed Chair Janet Yellen was asked this week if she thinks that President Trump has a grasp of economic policy, she responded, “Well, I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.”

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.