Category Archives: On The Markets

Week In Brief: July 27th

The S&P 500 hit a weekly peak on Wednesday’s close. Then drifted lower. Closing up 0.6 percent on the week. And reaching its highest point since January. Up 4.56 percent YTD. And back within 2 percent of January’s record high.

It was a tough week for many big tech and media stocks. As valuation always matters at some point. But the rest of the market, which remains a lot cheaper than the FAANG stocks, has held steady thus far.

It’s been six months since the last S&P 500 high. Marking the third-longest stretch below a new high since 2009. Yet, the all-time high sits only 1.5 percent above the index. So close you can smell it. But bears do not plan to just give anything away. And have been very effective these last six month at holding the line. And thwarting the bulls.
Continue reading

Week In Brief: Week of July 30th

Stocks rose ever so slightly last week. As the Dow Jones Industrial Average returned held the 25,000 threshold in its attempt to reclaim the January highs. Not to be outdone, the S&P 500 climbed back above 2,800. Where it currently sits 2.60 percent below January’s record high. Having risen 4.3 percent on the year.

The potential U.S.-China trade war continued to heat up. As both sides pressed ahead with tariffs on $34 billion in imported goods. And each threatened of more to come. President Trump warned that he could unleash tariffs on $500 billion worth of Chinese goods if trade terms are not eased.

Yet, stocks continued to see the forest for the trees. As shares climbed on a Goldilocks jobs report. Not too hot. But not too cold. Payrolls came in at 213k vs. an expectation of 195k. Besting the three-month average of 211k. Unemployment rose from 3.8 to 4 percent. As more American workers re-entered the labor force. Wage gains slowed.
Continue reading

Week In Brief: June 22nd

Equity markets took it on the chin last week. Reeling like punch-drunk fighters clinging to ring ropes just to stay upright. The only market cap to eke out a gain was the S&P 600 Small-cap Index, which rose a meager 0.2 percent. The S&P 500 lost 0.88 percent. While the DJIA fell 1.82 percent. And has gone negative (-0.5 percent) on the year.

Market breath remains positive and continues to support higher prices. Sector breath also remains positive, with 71 percent of industries above their 50- and 200-day moving averages. Yet, global markets appear in retreat. With Europe down -4 percent. Brazil down -19 percent year to date. China down -10.75 percent. And India lower by -5.4 percent.

The year’s surprising top domestic industry group? Retail. Up +29 percent. While the worst performing groups have been tobacco, conglomerates, household products and food staples.
Continue reading

Week In Brief: June 8th

Last week saw the S&P 500 rise 1.6 percent as stocks elevated on four of last week’s five trading days. Year to date, the index has grown by 3.09 percent. And ended the week only 3.27 percent below January’s record high.

Nine years into the economic recovery, there seems to be no trick of which the stock market is not capable. Nor will any record highs be safe so long as this current market momentum persists.

February’s 10.02 percent decline frightened many within the investor class. Helping to separate the wheat from the chafe as it brought many non-convicted investors to question their market optimism. Which led to a big percentage of lily-livered cash positions by mid-February. As recent market entrants – many of whom had only recently delved back into the deep side of the equities pool – once again found themselves quivering like wet Chihuahuas in the face of soaring volatility.
Continue reading

Financial Markets Weekly: May 26th

Here’s your financial markets weekly report for May 26, 2018.

Hoping everyone had an enjoyable Memorial Day weekend. Spent a bit of time remembering our fallen heroes. And reveling in the idea that summer has arrived.

And while spring showers will soon give way to sunny summer horizons, investors should beware. As some pundits believe the U.S. stock market may be in for a summer storm.

On the surface, things look reasonably placid. Despite last week’s volatile geopolitical events (e.g. trade war, Trump and North Korea, Italian bonds/government), markets remained strong. Underneath that positive surface, however, resides some real bearishness.

The average stock in the S&P 500 is underperforming the market by nearly a whole percent. While the S&P 500 is up three percent this year, the average stock has gained just 2.1 percent, showing that market breadth has narrowed. Which bodes ill for equity indices. As one of the bearish indicators typically occurring prior to a major correction is a negative advance/decline reading. Where stocks continue to elevate or trade sideways, even as more share prices fall than those heading higher. Such a condition reveals weakening market breadth. And typically precedes a move lower.

That said, the market will be forced from its indecision sooner than later. As the S&P 500 has furrowed itself into a wedge-consolidation pattern that eventually forces the underlying index to move higher or lower.

In geopolitics, it appears that the U.S./North Korean Denuclearization Summit could be back on. And the pending resumption of economic sanctions is on hold. Though we won’t be counting those chickens till they hatch. Still, N. Korean strong man Kim Jong-un’s right-hand man is scheduled to arrive in the U.S. this week under the auspice of continuing to lay the groundwork for a potential June 12th summit in Singapore.

General Kim Yong-chul has long been in the thick of intrigue wherever North Korea is concerned. The former head of military intelligence was allegedly the mastermind behind the Sony hacking related to the movie “The Interview.” As well as attacks on the South Korea warship Cheonan and Yeonpyeong Island in 2010.

Kim’s appearance marks the highest level North Korean visit to the U.S. since 2000. Check out the BBC’s profile of the general, here.

Staying in Asia, the Trump administration sent a brash message to Beijing: The U.S. is moving forward with tariffs on Chinese imports and restrictions on China’s access to sensitive U.S. technology. The White House will announce a final list of $50 billion in targeted Chinese imports by June 15. Planned investment restrictions are due by June 30. The move came as a surprise to Chinese officials. Given that the White House had for days suggested it would put such measures on hold during negotiations to narrow the $375 billion annual trade gap between the countries.

Perhaps the move was made for negotiating leverage. Or to simply make the point that this administration is through with Chinese stalling tactics that ensure nothing is accomplished while Beijing reaps the whirlwind of its trade surplus. Not to mention its ongoing thievery of western intellectual property. Either way, it’s good to see a hard stand being made. As the only position the Chinese seem to recognize is one of strength.

In Europe, Italy’s political situation continues to roil an increasingly fragile Union. March’s electoral victory by two populist anti-EU parties has prevented the establishment of a coalition government and could force another round of elections later this year.

Meanwhile, Italy’s escalating debt situation requires immediate solutions. Problematic, given the country’s inability to appoint an economics minister. Italy’s debt is more than 130 percent of its gross domestic product. Rendering it the most indebted European country behind only Greece. And unlike many of its eurozone peers, Italy’s economy remains weaker today than it was before the last crisis.

Italian two-year bonds have shot from offering negative yields to yielding 2.77 percent virtually overnight. A shocking move given the typically glacial pace of debt markets. Where a move of that size typically takes years. Shock waves resonated throughout the Italian economy. Having brought European finance minsters to shudder at the consequences should Italy spiral into a deeper debt crisis.

Traditionally, bonds represent the boring end of the investment spectrum. So, when such instruments — especially those of a sovereign government — make such volatile moves, it can only indicate a real sense of fear on behalf of bond investors who have essentially demanded much higher yields to compensate for the perceived risk of buying and/or holding such instruments. Something wicked this way comes…

Not that the world isn’t perfectly acclimated to Italian political crises. Silvio Berlusconi ran the place like his personal carnival for years. But this comes at a sensitive time for the EU. And, if push comes to shove, an Italian exit (Itexit?) from the EU would be standard deviations more harmful than Brexit.

For Europe, this Italian goat rodeo represents a self-reinforcing catastrophe: Lower sovereign bond prices (and thus higher yields) weaken bank stocks and bonds, resulting in a pullback in lending and capital market losses. Which in turn weakens the economy. Lowering tax revenues. Which further lowers government bond prices and raises borrowing costs as politicians are forced to consider bailing out their banks. Underscored by the realization that the situation can only get worse before it gets better. And whereas the EU was able to navigate Greece’s crisis five year ago, Italy’s economy is eight times larger. And its bond market, because of its indebtedness, is the world’s third largest. Making this a much bigger pill to swallow.

Of course, Italy will contend that it can batten down the hatches and reign in its spiraling debt concerns. Which, quite frankly, sounds about as plausible as a Wells Fargo apology ad. We’ll stand by the old John Michel dictum: watch what they do, not what they say.

The entire house of cards brings me back to another recent Southern European debt crisis. Athens, Greece. Summer of 2011. Protesting against austerity requirements mandated by the Northern European Industrial Overlords, the Greeks spent the summer gnashing their teeth, lobbing Molotov cocktails at government buildings, and making headlines. And why don’t these things ever occur during the winter? Perhaps Mediterranean mobs refuse to angrily take to the streets until its just a wee bit warmer…

Still, domestic markets long ago learned to acclimate to foreign financial and economic turbulence. Though caterwauling headlines will bring otherwise prudent investors to feign nervous tension in the weeks ahead, equity markets will soon enough digest Europe’s current crisis. Seeing it for what it is — foreign economic woes. And then returning to the business at hand: risk, reward, earnings growth and the fundamental merits of prospective opportunities.

Stay tuned for your next financial markets weekly update…

Financial Markets Weekly Recap

Major indices finished higher last week. The DJIA gained 0.15%. The S&P 500 rose 0.31%. The Nasdaq climbed 1.08%. While small ap stocks gained 0.02%. 10-year Treasury bond yields fell 12.5 basis points to 2.932%. While gold closed at $1,301.7, up $9.70 per ounce, or 0.70%.

Contact Us

Financial Markets Weekly: May 18th

Here’s your financial markets weekly report for May 18th, 2018. Equity indices finished lower last week. With the S&P 500, DJIA and Nasdaq posting slight losses. Small caps, however, managed a 1.6 percent gain. And now represent the best performing index year to date. I guess it isn’t the size of the ship after all.

Overseas, things have worsened. With Italy still the clubhouse leader at +five percent, but down four percent over the last few weeks. Most other nations are flat or negative. With India and Mexico leading the losses, at -8.1 percent and -7.6 percent, respectively.

Looking at commodities, crude oil leads the pack. Up 20.1 percent year to date.

On the fixed-income spectrum, everything has been roughed up. With Treasury, Junk and Corporate bonds down from two-to-seven percent year to date.

The plight of fixed-income investors may be the most telegraphed risk of 2018. As investors are forced to endure losses across fixed-income portfolios. Following a 35-year bull market in bonds, interest rates are now rising. And remember, there is an inverse relationship between interest rates and bond values… when one rises, the other drops.

While no honest arbiter can tell you where stock indices will be a year from now, most market observers can say with near certainty that interest rates will be higher. Translating to lower bond values. So, those holding bonds and bond funds will see bond values drift lower. Forcing them to contend with the idea that the allegedly most conservative facet of their portfolios is causing the most volatility. And potentially the biggest losses.

Consider the venerable PIMCO Total Return fund, a fixed-income stalwart in portfolios nationwide, which has lost 2.5 percent year to date. A tough pill to swallow. Especially for retirees who naively placed the lion’s share of their IRA rollovers into — what they believed were — conservative, buoyant, fixed-income mutual funds.

Of course, Wall Street has been selling Main Street on the diversification benefits of “stocks, bonds and cash” for years. Little wonder when two or more don’t work, investors are beside themselves.

Ironically, there are a myriad of fixed-income alternatives from which to consider. But most investors don’t know where to look. And most advisors are too lazy to find them. Negative duration vehicles and LL bonds represent a couple options that might shield clients from falling bond values. But investors need consider this conundrum moving forward. Because rising rates will be part of the landscape for some while.

While we’re on the topic of interest rates, we may have reached an inflection point in the market-economy mechanism. For the first time since 2008, short-term Treasury yields have just reached the same level as equity dividend yields. It is not even the two-year Treasury we are discussing. But rather the three-month. Now sporting a yield of 1.9 percent. The same as equities.

Not trying to sound alarmist. But the convergence of various yield rates has historically provided a strong warning of a pending recession.

That said, the world’s largest asset manager has just recommended that we stick with U.S. equities. Summarizing, BlackRock believes that “fears of peaking earnings are overdone”. The mega-manager believes that worries over macro concerns have overshadowed what has been very strong fundamental performance.

Further, we’d think Q1 earnings results would be enough to bolster investor confidence. With earnings season nearly complete, top and bottom-line results were strong. Especially compared to expectations.

The Q1 earnings-per-share beat rate was 67.9 percent. While the revenue beat rate was an even-more-impressive 71.6 percent. Both of which represent great results. Importantly, earnings guidance moving forward pointed towards further quarters of above-average earnings growth.

Still, don’t get overly sanguine. We’re not completely in the clear yet. With any number of major downside catalysts to navigate in the months ahead. Mid-term elections. Surly Democrats vying to take the House and impeach the president. Trade talks with China, Mexico and Canada. The results from the special counsel investigation into Russian interference in the 2016 election. Increasing militarization in the Middle East. And seasonal headwinds. Like the idea that we’re entering what has traditionally been the worst six months of the year for stocks.

The point? You’d best have low-correlation investment vehicles in your portfolio. Learn more by reading the white paper on navigating bull and bear markets, here.

In the oil patch, Brent and WTI crude have each set new three-year highs. While their stock-index proxies sport some of the prettiest charts in the market. Since June 2017, geopolitics, OPEC’s commitment to lower production and increased demand have conspired to drive oil prices higher. With the Energy Sector SPDR (XLE) up 9.97 percent on the year. Compared with a 2.5 percent gain for the S&P 500.

Though investor sentiment has drifted lower, we remain in a bull market. And the SPX Energy sector will likely log 65 percent earnings growth this year. Another 7 percent in the next. And 11 percent in the third-year estimate.

Current energy sector EPS estimates represent by far the best number among all S&P sectors. And though the earnings number is outsized due to a rough stretch from 2014 to late 2017, with a P/E of 18x forward earnings, this sector remains inexpensive, assuming earnings come through. More attractively, the sector’s dividend yield is 3.56 percent on forward numbers. And 8.4x cash flow versus a 2 percent dividend yield on the S&P 500 and its 11.2x cash flow reading.

Following all the sector’s tumult these last few years? One helluva turnaround story! Those who’d continued to short the energy stocks have learned a powerful lesson this last year: assets can lose value for a lifetime. But, once they’re cheap, hated and in an uptrend? Mean reversion can’t be far off.

In the nation’s capital, a recent audit reveals continuing shoddy cybersecurity measures at the IRS. Stating that the agency hasn’t accurately cataloged all the components of its highest value hardware and software systems. Nor does it have an exact count of who has privileged access to its most sensitive systems.

Further, the IRS also likely isn’t patching software vulnerabilities on its highest value assets within the 30-day timeframe required for federal agencies. And because the agency doesn’t maintain historical data about patching, however, it’s difficult to say for certain how long vulnerabilities remain unmatched.

Bottom line? Government agencies with access to the most sensitive U.S. taxpayer data continue to lag woefully behind their private sector counterparts. Leaving taxpayer data vulnerable to hackers, foreign governments, terrorists and myriad other bad actors.

Now, a look at geopolitics.

Two weeks ago, President Trump pulled the plug on the Joint Comprehensive Plan of Action (JCPOA). Terminating the agreement designed to keep Iran’s nuclear ambitions in check over concerns that Iran was using much of its newfound economic clout to sponsor terror (Iran is the world’s largest state sponsor of terror) and unrest from Syria to Yemen. Worth noting that many of Iran’s neighbors doubted that the JCPOA had ever prevented Iran from moving – albeit more slowly – towards its nuclear ambitions.

The consequences of last week’s decision?

New investment in Iran, from both Asia and Europe, will slow if not cease because of the new U.S. sanctions. Economic forces are being set in motion which will cause significant problems for the Iranian regime. Especially considering that Tehran’s military activities in Syria, Lebanon, Gaza, and Yemen have much increased since the JCPOA was signed.

With less oil to sell into the markets, Iran’s cash flow will diminish. As will, hopefully, its status as the world’s leading state terrorism sponsor.

Regarding those who argue that Iran is now set to resume its nuclear program? The “locals” in the Middle East do not believe that Tehran ever stopped. But that they simply sent remnants of the program further underground. And we believe Iran’s neighbors, those scrutinizing the Islamic Republic most closely, probably know best. They report that Tehran continued to move ahead on its nuclear ambitions even after the agreement was signed. Moreover, the JCPOA was never air tight enough to ensure that the mullahs weren’t still building a bomb.

More recently, the tariff truce established this week was welcomed news in D.C., Beijing and on Wall Street. And don’t think for a moment that these talks are not tied to North Korea.

Trump has tied everything together. National security. Economics. Trade. Tariffs. Intellectual property. Tech. And energy.

It’s likely that the tariff treaty will now set the stage for North Korean talks. Moreover, the truce could help the U.S. farm bill to pass. And boost equity markets at a time when shares have been consolidating.

Though Europe remains agnostic on the situation between D.C. and Beijing, they are livid about the Iran sanctions. And the enthusiasm with which D.C. has pursued them. Clearly, tough sanctions are coming. With or without EU support.

All of which, by the way, will be bullish for oil, energy stocks and inflation.

Finally, Venezuela’s government — which uses more gimmicks than a traveling carnival — conducted another sham election over the weekend. “Re-electing” Nicolas Maduro, who has managed to destroy the nation’s economy, ruin Venezuela’s energy sector while global oil prices have shot higher, and starve large swaths of the population. Otherwise, he’s done a fabulous job for the Venezuelan people and will remain in office for a second term.

You can either enjoy the absurdity, or drown in it. Stay tuned for your next financial markets weekly update…

Financial Markets Weekly Recap

Major indices finished mixed last week. The DJIA lost 0.47%. The S&P 500 fell 0.54%. The Nasdaq fell 0.66%. While small cap stocks gained 1.23%. 10-year Treasury bond yields rose 8.8 basis points to 3.059%. Gold closed at $1,292.60, down $25.70 per ounce, or 1.95%.

Contact Us

Financial Markets Weekly: April 27th

Here’s your financial markets weekly report for April 27th, 2018. Earnings season has not disappointed. Leaving investors puzzled as to why such positive results have not reignited animal spirits.

With 53 percent of the S&P 500 having reported thus far, 79 percent have beaten estimates. Should this average hold up, then it will be the best quarter for upside surprises since FactSet started tracking the numbers in 2008. In the aggregate, estimates are beating by 9.1 percent.

And yet, stocks have continued in a sideways consolidation pattern since having set their late January highs. Having now developed a technical wedge pattern that portends an inevitable breakout. Though nobody knows whether that breakout will be higher or lower.

What’s this market trying to tell us?

On the economic front, Q1 GDP increased at a 2.3 percent annualized rate. Beating the 2.1 percent estimate but representing a slowdown from the 2.9 percent pace of Q4. Consumer spending weakened. Jumping just 1.1 percent after growing 4.0 percent in Q4 as a slowdown in credit growth, higher gas prices, and an ongoing wait for meaningful wage growth all weighed on sentiment.

Laksman Achuthan of the Economic Cycle Research Institute (ECRI) has been extremely accurate in predicting economic slowdowns past. He called the 2001 recession. And the 2008 recession. And today, he’s forecasting an economic slowdown. One that shows the global leading economic indicators drifting from their cycle highs. And slowing economic growth around the world.

Couple that trend with the idea that global central banks are now tightening monetary policy (quantitative tightening, or QT) as opposed to easing monetary policy (quantitative easing, QE), and the world’s economy is left in a precarious position. Achuthan believes the pullback in economic growth will adversely affect the global economy. He’s just not sure how much. And has not specified whether such a slowdown will lead to a global recession.

But money managers have gotten the message. As the latest Global Fund Manager Survey from Bank of America Merrill Lynch was entitled, “The Silence of the Bulls.”

The survey was designed to provide an idea as to how fund managers are thinking right now. And right now, they’re scared. CNBC explained that the latest survey represents bad news. Fund managers are worried that the market has peaked for this cycle.

What’s more, individual investors are scared.

For the first time since Trump was elected, more investors expect the stock market to fall than to rise. So reads the monthly survey by The Conference Board, an independent research company.

And Bespoke Investment Group underscores those sentiments. Reporting a dramatic shift in the public’s attitude toward stocks.

Three months ago? Confidence was at record levels. With more than half expecting higher prices. Now only 32.7 percent of the public expects higher prices. That’s the fastest serious downshift in 30 years. Equity bearishness has risen from November’s multi-year low of 19.9 percent to 33 percent today. Marking the first time since the 2016 election that more consumers expect stocks to drop than rise.

Still, fret not, gentle reader. Has not our contrarian nature helped us to profit in similar situations gone by?

All the aforementioned negativity represents good news in the aggregate. Look no further than the five similar three-month stretches since 1987 when the percentage of U.S. investors expecting higher prices fell sharply. The S&P 500’s ensuing one-, three- and six-month returns were all positive on average.

Bespoke points out that what makes the current decline in market sentiment noteworthy is that the composite of economic sentiment remains near its highest level since January 2001. Not that the economy and the stock market always move in lockstep. But, the current disparity between the public’s view on both is abnormal. And such spreads tend to narrow over time. With the most likely outcome being a move lower in economic confidence paired with a move higher in market confidence. Simple mean reversion at work.

Economic confidence drifting lower while stock indices drift higher? Works for us.

Economic data has been good. But not stellar. Last week saw just over half of 24 major economic indicators exceed forecasts. With housing as a standout. And consumer confidence high.

But the public tends to misread economic data. Failing to remember that economic data paints a portrait of what just happened. While the stock market constantly speculates on that which is to come.

Currently, investors are trading as if all the good earnings news is priced in already. Of the stocks that have reported this season, those beating EPS estimates have gained just 0.46 percent on their earnings reaction days on average. While those that missed EPS targets have fallen 3.86 percent. Simply reporting inline EPS has resulted in an average one-day stock price decline of 1.76 percent. Of course, this is what happens in bearish stretches of a market cycle. And will continue to be the case until the market is forced from the current consolidation wedge pattern in which it’s trapped (see above chart).

One asset class not trapped within a sideways pattern? Interest rates. Which are rising. And will continue to do so for some time into the future.

Clients often ask when rising bond yields might inhibit stock market growth. Well, the following table by Cycles Research demonstrates that rising American bond yields do not necessarily spell the end of rising stocks. Especially if yields rise due to economic growth which translates into higher corporate earnings. This is precisely the environment we have in the U.S. now.

Leading us to ask: could 2018’s big surprise (there’s always one!) be that 10-year Treasurys yield between 3.5 and 4 percent even as the S&P 500 climbs above 3,000? It’s been a long time since the U.S. has had an economic/market environment like this. But historical data shows it can happen.

Moreover, we do not believe there will be a recession this year. If only because of November’s election. Recessions rarely occur during election years. As there is generally plenty of government spending. And an administration that continues to pine for higher share prices.

Of course, not everyone’s been pining for share prices to rise.

Since 2014, seven large tech companies have accounted for more than 60 percent of the S&P 500’s gains. These are Amazon, Netflix, Nvidia, Facebook, Alphabet, Microsoft and Apple. At least five of these have appeared ripe for short sales throughout much of their climbs due to super-enhanced valuations. However, shorting them was the equivalent of stepping in front of a speeding locomotive. Which is exactly what famed hedge-fund manager David Einhorn (Greenlight Capital) did. Choosing to short Amazon, Tesla and Netflix throughout most of last year. Even as Amazon climbed 56 percent. Netflix gained 55 percent. And Tesla added a paltry 45.70 percent.

The underlying message? You can be really smart. A really successful. But don’t ever lose sight of the fact that stock valuations can remain at stupidly elevated levels for irrationally long periods of time. Turning an otherwise prescient call into a losing proposition.

Which is to say, the path to being right is littered with the bankrupt carcasses of obstinate, inflexible investors. Despite the volatility, most of tea leaves we track reveal a positive landscape for equities. One in which all risk-management tactics should be employed. Yet, positive all the same.

And while equities have been volatile, small-cap shares have been quietly closing in on new highs. Perhaps mean reversion is handing the torch back to the smalls after nine years of large cap dominance. Further, small cap equity gains often serve as a sign of continuing economic vitality.

Geopolitically, unforeseen progress appears in the offing with the formerly intransigent North Korean regime. As former CIA director cum Secretary of State Pompeo recently convened with counterparts from North and South Korea. The meeting was meant to lay the plumbing for a real discussion on North Korea’s de-nuclearization to be held this summer. And initial reports scored it a success.

This was followed by an historic state visit to South Korea by the North’s Kim Jong Un.

We have other, less direct but no-less empirical evidence as to the North’s serious mindedness.

During an April 11th meeting of North Korea’s Supreme Assembly, Choe Ryong Hae, Vice-Chair of the NK Central Committee, described North Korea as a strategic power and a global military power. He did not mention NK as a nuclear power. Which, given the source of pride the nation’s burgeoning nuclear ambitions have been, is news in and of itself.

In 2012 and 2013, the North Korean constitution was amended to include language which supported NK becoming a nuclear power. Vice Chair Ryon Hae would have been well within standard NK orthodoxy to refer during his speech to NK as a nuclear power, or as being committed to becoming a nuclear power. He did not. Marking a diversion from the regime’s standard operating procedure of the last few years.

That said, we recognize that NK has lied, cheated, misdirected and obfuscated at every opportunity these last five years. It would not be surprising to see the North playing yet another version of its incessant game of cat and mouse. But… what has been accomplished the last two months is more progress than has been made since the issue of the North’s nuclear ambitions first became public. And every step forward is a reason for cautious optimism. Perhaps, even the likes of Kim Jong Un can choose to come in from the cold.

Somewhere, John Le Carre is smiling… Stay tuned your next financial markets weekly update.

Financial Markets Weekly Recap

Major indices finished down last week. The DJIA lost 0.62%. The S&P 500 fell 0.01%. The Nasdaq fell 0.37%. While small cap stocks lost 0.50%. 10-year Treasury bond yields fell 0.3 basis points to 2.958%. Gold closed at $1,323.35, down $12.25 per ounce, or 0.92%.

Contact Us

Financial Markets Weekly: April 13th

Here’s your financial markets weekly report for April 13, 2018. Stocks rose last week. Continuing to elevate following April 2d’s double tap of the February 8th lows at which the S&P 500 hit 2,581.

Perhaps last week’s gains were due to positive anticipation of earnings season. Which began Friday. And featured higher Q1 earnings and profits from J.P. Morgan, Wells Fargo and PNC Financial Services. These and other bank stocks have outperformed the broader market since the 2016 election. Although last week’s solid reports failed to send them higher. As all three sold off.

It’s possible that investors were concerned about the impact of rising interest rates on future earnings. Or perhaps the market was held in check as investors fretted over possible airstrikes in Syria (more below). Or was it the possible trade war with China?

Regardless, the details spooked traders. With JPM’s credit card charge-offs surging to a six-year high. And WFC reporting the worst mortgage loan numbers since the financial crisis. We’ve discussed the ill effects of higher interest rates on consumers and home buyers. Now there’s evidence that these issues are straining the real economy. The fact that global economic metrics have fallen short of estimates on a pace not seen since last summer, as shown in the global surprise index below, adds to investor angst. And merits attention moving forward.

Still, after all the political rhetoric, it is a relief to see Q1 earnings underway. Providing the opportunity to place attention back where it should be.

And Q1 earnings expectations have soared. With optimism emanating from analysts. And management teams having issued record upside guidance. If that comes to fruition, then stocks will have reason to careen higher following the recent volatility, which saw the S&P 500 double tap its 200-day moving average. Even closing below the 200-DMA for a day. Which it had not done since June 2016. Properly spooking investors from becoming too bullish. Which, counter-intuitively, is a positive.

The S&P 500 now posts a forward multiple of 16.7 times earnings. Much lower than the 18.25 P/E reached earlier in the year. The index is flat on the year. Despite what seems like a surplus of purportedly negative news. Leading us to believe that investors have sharpened their skills at teasing the truth from today’s headlines.

Year to date, the best sectors have been technology (+4%) and consumer discretionary (+2.9%). The worst? Consumer staples (-7%) and telecom (-5.6%).

Volatility has been high. Nor will that change. Remember “Sell in May and go away?” The new year has already seen 28 days with market moves of one percent or more. Last year saw only eight such days throughout the entire year.

Overall, the S&P 500 is down eight percent from the January’s record high. The average large-cap stock is down 13.8 percent. While the average small-cap is 18.3 percent lower. A discrepancy that stems from the resolute performance of mega-cap technology stocks like Apple and Microsoft, which have fallen only five and four percent respectively. And remain over-weighted in the indexes.

Bulls and bears find themselves in a stalemate. Fighting it out for existential possession of the market’s trendline. Even as bulls appear to have so many structural advantages. Like corporate stock buybacks, and money pouring into equity-focused retirement accounts from a near-record labor force. Bulls better make a move soon or they may find themselves overwhelmed by Bears who are tired of being the under card.

Now, a quick note on Facebook.

Founder Mark Zuckerberg spent two days testifying before the Senate last week. Leading many clients to ask if we planned to continue holding Facebook following the controversy. And while we did sell half our position, we have no intention of selling more. In fact, we believe that the recent sell-off will ultimately represent a buying opportunity.

Despite the controversy, the world continues to log in. With billions of users sharing posts, photos and facets of their lives on FB and sister company Instagram (yes, FB owns Instagram…). Regardless of the media’s haranguing, there simply is no alternative to these two properties. FB’s business model represents one of the most powerful and effective “network effects” ever realized. It gets bigger and better as more users log in and share their lives. Making the network even more attractive to future users. Adding eyeballs and data to the network. Making it more attractive to advertisers, as well.

Outside of a couple of Chinese networking alternatives (American social networking companies have made few inroads into the Middle Kingdom), there remain no real competitors. And with more than two billion users, FB continues to represent an incredibly powerful economic engine and cash-flow machine.

In short, it’s one of the most capital efficient businesses around. And in due time, once the blowhards in D.C. have their say, the recent 15 percent pullback will be viewed as an excellent buying opportunity. As of today, the stock has already bounced 8.5 percent off the low. So, let’s not confuse controversy with catastrophe. Because regarding FB’s future prospects , this is not that.

On to the Middle East.

In response to Syrian dictator Bashar al Assad’s brutal chemical attack against Syrian citizens outside of Damascus last week, a U.S.-led coalition fired more than 100 missiles at three different positions inside Syria at 4 a.m. Saturday morning, local time.

The most significant target was the Barzah Research and Development Center, located close to downtown Damascus, and heavily protected by Syrian air defenses. That facility was targeted by U.S. warships, which launched 57 Tomahawk cruise missiles and B-1 bombers fired 19 JASSM missiles. The bombers were escorted by attack aircraft and an EA-6B electronic warfare jet.

The second site was the Hims-Shinshar Chemical Weapons storage facility near Homs, against which U.S. forces fired nine Tomahawks. The British fired eight Storm Shadow cruise missiles from Royal Air Force Tornado jets.

The third target was the Hims-Shinsahar Chemical Weapons Bunker, which was the destination for seven French SCALP land cruise missiles.

According to the U.S. military: “This is going to set the Syrian chemical weapons program back years,” Lt. Gen. Kenneth McKenzie, Jr. told reporters.

In D.C., Speaker of the House Paul Ryan announced that he will step down. Surprising many. And exacerbating the sense of panic already enveloping House Republicans over November’s mid-term elections. The battle to succeed him — as Speaker should the GOP retain the House, or Minority Leader should they fail — will be hotly contested. And the battle for the GOP’s soul will play out in real time.

Also, National Security Advisor Lt. General H.R. McMaster was let go and replaced by former U.N. ambassador John Bolton. Bolton represents the third NSA in a year.

Major League Baseball paid its annual homage to Jackie Robinson over the weekend in commemoration of the watershed moment in 1947 when organized baseball’s color barrier was finally broken. All players wore Mr. Robinson’s number 42. And there were many touching moments throughout the weekend. None of which prevented our Cincinnati Reds from starting the season at 2-13.

Finally, a quick glance at brilliant historian Niall Ferguson’s latest book,The Tower and the Square. In which he spends a good part of one chapter documenting the percentage of people worldwide who believe in one form of conspiracy theory or another. Ferguson shows how the dominance of Facebook and Twitter has broken us down into tribes. Where, increasingly, we speak only to our own kind. Reinforcing our parochial beliefs and idiosyncrasies.

Worse, we are increasingly overconfident in our own beliefs, Even when lacking expert confirmation. That’s no surprise to traders and investors. Who have long known that the crowd is often wrong. But also realize that the crowd can believe itself to be right a lot longer than it should have. Which usually leads to asset bubbles.
Below, you will find a Quartz article by Olivia Goldhill discussing a new paper by social psychologist David Dunning. Extreme wonks might recognize the name because, partnered with Justin Kruger, he defined the “Dunning-Kruger effect.” Which explains how people who lack knowledge on a particular topic tend not to recognize their ignorance. Which is to say, we often don’t know how little we actually know.

In his latest research, Dunning surprises us again. Revealing that we often make bad decisions not because other people trick us, but because we trick ourselves. “To fall prey to another person you have to fall prey to your belief that you’re a good judge of character, that you know the situation, that you’re on solid ground as opposed to shifty ground,” he says.

When we were all living in small bands on the African Savannah, this was a good survival trait. But then it was easy to see who could and could not be trusted. Because the decisions we were making were pretty simple. Today, the world is vastly more complex. Leaving us to often rely on “experts” to make decisions for us. Even though such experts bring their own biases, assumptions, and agendas — limitations that often they aren’t aware of.

Today’s investors (consumers, parents, managers, employees, etc.) face such a tsunami of information that no one person can stay on top of it. So what we are “sure” about is no longer as sure as we once thought it was. And in a world of social media, where we are breaking up into tribes that live in their own echo chambers (rather than as one big happy family, which is what the developers of social media thought we would become), it’s harder to know what is right and true. Leading to “Fake news!”

Yet another example of unintended consequences. And a reminder of how investors (and human beings) must be ever vigilant against the plague of our own narrow perceptions. As well as our self deceptions. And the need to mitigate the risk of poor decision making emanating from both.

Stay tuned for your next financial markets weekly update…

Financial Markets Weekly Recap

Major indices finished higher last week. The DJIA gained 1.79%. The S&P 500 rose 1.99%. The Nasdaq climbed 2.17%. While small cap stocks gained 2.39%. 10-year Treasury bond yields rose 5 basis points to 2.82%. Gold closed at $1,345.43, up $11.78 per ounce, or 0.88%.

Contact Us