- 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.
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%.
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.