U.S. stocks rallied Wednesday. The most they’ve leapt in eight months. The dollar fell. Emerging-market assets surged. Responding like Pavlov’s dog to the dovish tone from Fed chairman Powell. One that fueled speculation that the central bank is closer than thought to pausing rate hikes.
Stocks that had fallen the most during the six-week slump led the gains. Aggressively responding to Powell’s comments that rates are “just below” a neutral-policy range. Potentially removing one of the markets biggest drags.
Powell added that the economic outlook remains “solid.” Which underscored expectations for a December rate hike. But he added that the effects of higher rates take time to show up in data. Which led investors to surmise that the Fed is likely to reduce the number of hikes, if not outright pause them, next year.
Stocks were as listless last week as Uncle Lou in a tryptophan stupor on Thanksgiving night. Dropping 3.77 percent over the holiday shortened week. And stoking fears over the end of the bull market.
Bulls would posit that stocks have become extremely oversold and were due for a bounce. With such a bounce providing the catalyst for much-desired Santa Claus Rally. But what could motivate weary buyers amid the current gloom?
Consider that Q3 pre-tax corporate profits rose 3.4 percent — the fastest quarterly growth rate since Q2 2014 – and have risen 10.3 percent in the past year. The largest four-quarter increase since mid-2012. And thanks to the tax cuts, after-tax profits are up nearly 20 percent this past year.
Further, real GDP grew at a 3.5 percent annual rate in Q3. Matching the initial estimate as well as consensus expectations.
Despite such positive data, markets remain bogged down in a gloomy quicksand of cynicism, uncertainty and despair.
Perhaps the missing catalyst could be super optimistic earnings expectations. Though we doubt it. As companies have tried to temper expectations. And the media appears hellbent on the “peak-earnings” narrative.
So, in what form might our catalyst appear?
One arrived this week in the form of the Fed’s announcement that it may slow or pause interest-rate hikes next year. With the current rate being much closer to the desired rate than previously thought.
Another could come in the form of a massive, bi-partisan infrastructure bill.
Also, any allusions to improved U.S.-China relations following this weekend’s dinner meeting in Buenos Aires between Trump and Xi might light a spark. As that relationship has weakened, of late. In fact, China imported no U.S. oil in October. The first time that’s occurred since February 2017. Simultaneously, China has dramatically reduced its purchase of U.S. Treasury bonds. Essentially reminding us “who’s our daddy” when it comes to financing our increasingly unseemly national debt.
Regardless, something’s afoot. We’ve been so fixated on the recent volatility that we may be missing the forest for the trees. The headlines tell us that some global dynamic is in motion. One need only connect the dots to reveal the greater constellation. But thus far, whatever is transpiring has been anything but clear. It always is.
Consider the potential meaning behind these shifting tectonic plates, and what they might add up to in aggregate:
-What brought crude oil to precipitously plunge $25 per barrel? Is demand signaling a dramatic slowdown in global growth? Was it a political chess move, with the Saudis’ attempt to placate the White House following the Khashoggi murder in Turkey?
-Continuing, what might be the impact of lower crude prices? Could it ruin the budgets of oil exporters like Russia, Canada and Venezuela? How will that impact the global economy? Will it cut U.S. inflation so dramatically that the Fed can slow its rate-hike campaign?
-How does dramatically lower crude prices impact U.S. oil-and-gas-producing regions? Will lower prices bring producers to cut production, followed by employee layoffs? How could that ripple across the nation’s energy producing regions as local retail, service and real estate industries respond in kind? Most impacting those parts of the country President Trump views as his base?
-What might this week’s skirmish between Ukraine and Russia mean? Is it tied to the failing Maduro government in Venezuela, and that nation’s need to sell 1.2 million barrels of oil per day just to remain current with debt payments to Russia and China?
-Why did Iranian President Rouhani tell an Islamic Unity Conference in Tehran that his country is prepared to defend Saudi Arabia from terrorism and Western superpowers? That the people of Mecca and Medina are Iran’s brothers? The two countries have been mortal enemies for decades. Is this also oil-related? And to what end is Rouhani playing?
-Why did Commerce Department publish a document Monday announcing new controls for AI, computer vision, speech recognition, audio and video technology, microprocessor technology, 3D printing, self-driving cars, robots, and quantum computing, among others? A move that could have an incredibly adverse effect on the U.S. tech industry’s sales models.
Bottom line? Something big is happening. Something big and interconnected. Investors need only connect the dots to make sense of today’s tremendous swings in volatility. Of course, solving such riddles presents an immense challenge. One that drives us day in and day out.
If and when we discern a pattern, you’ll be among the first to know.
This week’s G-20 meeting should be the most lively in years. As a slew of recent geopolitical events have set the stage for the much-anticipated gathering in Buenos Aires. Among the most pressing? The U.S. plans to raise tariffs on $200 billion of Chinese imports to 25 percent in January. Notwithstanding some agreement reached at Saturday’s tete-a-tete, that is. Any progress to that end would buoy markets. And some buoyancy is needed. As investors appear fixated on a myriad of concerns.
The prospects of a slowing global economy. Russia’s firing on Ukrainian naval vessels. The plunge in global oil prices. Brexit. Venezuela’s unfolding political and economic disaster, and the refugee crisis it’s creating. All will be on the table in Argentina. And with Angela Merkel attending her last G-20 meeting as Germany’s leader, we expect multiple narratives to emanate across the headlines.
Interpol, the world’s top law-enforcement agency, elected a South Korean police official as its chief this week. This follows a controversial few days during which the global crime-fighting community believed the agency was set to select a Russian general to its top post. Alarming law enforcement and intelligence officials, while drawing sharp rebuke from human rights observers.
Interpol has 192 members. Fourteen of which are democracies. Which, of course, account for 74 percent of the agency’s funding. They’d best use that financial leverage to change the body’s archaic processes at this year’s summit in Dubai. Lest, in the future, despotic bullies find themselves succeeding in co-opting the world’s governing legal and crime fighting entities. Despotic bullies that don’t even recognize the rule of law at home.
Finally, we were surprised to see that life expectancy for Americans fell again last year. Lowered by the sharpest annual increase in suicides in nearly a decade. As well as a rise in deaths related to the opioid drug crisis. Influenza, pneumonia and diabetes also factored into the increase.
Life expectancy is an important measure of a nation’s prosperity. The 2017 data paint a dark picture of well-being in the U.S. Yes, the economy has improved at the macro level. But this data reveals the effects of addiction and despair, as well as diseases plaguing an aging population and people with less access to health care.
So often we take our health — physical and mental — for granted. We shouldn’t. Take care of yourself. And those around you. And stay tuned…
Major indices finished down last week. The DJIA lost 4.44%. The S&P 500 fell 3.79%. The Nasdaq fell 4.26%. While small cap stocks lost 2.54%. 10-year Treasury bond yields fell 2 basis points to 3.05%. Gold closed at $1,222.21, up $1.71 per ounce, or 0.14%.