The economic calendar is a big one, featuring the employment situation report on Friday. The rest of the data – ADP employment, auto sales, and the ISM surveys – will be released over 2 ½ days. The US Independence Day celebration on Thursday will provide one type of fireworks. And of course, we have Canada Day on Monday. The combination of events, data, and the calendar make the week ahead even murkier than usual. I expect an initial focus on the US/China trade truce, a shift to discussion of the implications for Fed policy, and a fast exit for the beach. The all-important employment report will be covered by the “B Team” with further reaction next week.
This leaves the remaining pundits to sort out the implications of the trade truce:
Will the market see fireworks from the trade policy shift?
The markets will vote, and the pundits will pontificate. Let the spinning begin!
Last Week Recap
In last week’s installment of WTWA, I predicted a focus on the upcoming G20 meeting and US/China trade talks. I also wrote, “It is absolutely crazy to guess the outcome, and I will not try! Those who think they understand Chinese motives and decision processes are too confident. Those who think they can predict the President’s next move are even further off base”. That did not slow the pundits down at all! Two China experts on Friday afternoon financial TV agreed that Trump and Xi were both benefitting from the standoff and would keep it going through the next Presidential election.
Being an expert on China is not the same as assessing the politics behind decisions in the US, particularly those made by President Trump. I’ll offer more on this topic in today’s “Final Thought.”
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski, who conveys a lot of key information in her picture worth more than a thousand words.
The decline for the week was 0.3% and the range only 1.4% — a very quiet week. Our weekly Indicator Snapshot provides a handy history of both actual and implied volatility.
The Presidential election season has started with two debates among Democrats last week. Viewership was 14 or 15 million households, a bigger audience than expected. The Pew Research Center has a recent poll about the state of political discourse in the U.S. You will be surprised to learn what people find as unacceptable. It seems like the public reaction to negative campaign ads. Voters condemn them, but they work.
I did an early analysis of what the early election news means for investors. Hint: Don’t make the mistake of taking it too seriously.
And FiveThirtyEight presents The First Democratic Debate In Five Charts. Here is one of them.
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators are an important part of our regular research. There are three different groups. Long-term indicators remain positive and the nowcast is weakly positive. The short-term message is neutral. This is an improvement over our last update, but NDD emphasizes that the Fed and the trade wars “remain crucial.”
- Home prices increased 0.4% on the FHFA Index, beating expectations of 0.2% and March’s 0.1%. The Case-Shiller increase was 2.5% (YoY), in line with expectations and down slightly from March’s 2.6%. (Calculated Risk). Bill notes that it is important to go beyond nominal pricing and consider changes in real terms.
- Michigan sentiment was 98.2 for June slightly higher than May and expectations – both 97.9.
- Pending home sales for May increased 1.1% beating expectations of 1.0% and April’s decline of -1.5%.
- Mortgage rates declined.
- Mortgage applications were up 1.3% last week versus a decline of -3.4% the prior week.
- The PCE price index increased 0.2% on both headline and core, roughly in line with past trend and expectations. This leaves the Fed with a free hand.
- Personal income for May increased 0.5%, matching April’s gain and beating expectations of 0.3%.
- Personal spending was up 0.4%, meeting expectations. This was a decrease from April, but that report was revised to a 0.6% gain rather than 0.3%. The spending result is excellent in this context. (Brian Wesbury).
Initial jobless claims increased to 227K up from 217K the prior week and missing expectations of 219K.
Consumer confidence for June was 121.5, missing expectations of 132 and the May’s 131.3.
Negative EPS guidance is the second highest since Q2 of 2006. (John Butters, FactSet). In contrast, since early April ’19, the expected 2019 SP 500 growth rate for earnings has been constant at 3%. (Brian Gilmartin).
New home sales for May increased 626K (SAAR) missing expectations of 683K and April’s 679K. Calculated Risk analyzes this miss but sees a solid start to the year so far. This is especially true given that the difficult comparison period from 2018 has passed. MarketWatch notes the decline and analyzes the contrast with the results in home building stocks where the companies have managed supply. And finally, lower rates may help.
Where US Government Debt is Headed by economist Timothy Taylor. His level-headed analysis shows the principal sources under current law, using analysis from the non-partisan Congressional Budget Office.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
The economic calendar is a big one, compressed into three 1/2 days with a holiday in the middle. Employment news is the highlight. There are also important reports on both the ISM Manufacturing and the ISM Non-Manufacturing indexes. In private data releases we’ll see updates on auto sales.
Despite the importance of the monthly payroll employment report, I expect many market participants to head for the beach before mid-day on Wednesday.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
The early part of the week will be focused on the trade truce. Attention will quickly turn to the implications for Fed policy and finally to the fresh economic data. Politicians of all stripes as well as the market punditry will join in the spinning, asking:
Will the market experience Chinese fireworks or another trade negotiation dud?
Understanding the week ahead requires some interpretation of last week. The reliably bearish community on my Twitter list cites the 1% S&P increase on Thursday and Friday as a pre-G20 rally. Sheesh! When will people learn that a 1% move cannot really be explained. It is routine for a single day, much less two days. Market veterans had a better take. Paul Schatz cites HUGE Crosscurrents on Friday.
Interesting day on Friday. We have end of week, month, quarter and first half of 2019. The skeptic in me says some portfolio managers could play some games to mark up their positions. I know. I know. You are SHOCKED to hear this. I mean, money wouldn’t cause people to do unscrupulous things, right?
Next, we have the last day for positioning ahead of the G20 meeting in Japan where Presidents Trump and Xi will meet tonight to discuss the tariff tantrum. I really would be surprised if Trump doesn’t basically lay down and meet some of Xi’s demands before talks can be restarted. I think Trump sees a weakening economy that will only be made weaker by all these tariffs. With a reelection campaign kicked off, the president can ill afford even the whiff of a recession between now and election day. I think he has a steep uphill battle in that regard.
The Russell Company is holding it s annual rebalance today when all of the Russell indices will have new and updated constituents with the most popular being the Russell 2000 Index of small cap companies. Over the years, I have noticed some “curious” behavior in the Russell 2000 on rebalance day. Hundreds of billions of dollars are potentially involved and portfolio managers have to decide whether to rebalance all at once, over the course of the day or over a few days.
Eddy Elfenbein describes the strong start to the year in the face of the negative noise.
If you had paid attention to the talking heads, you probably would have been scared out of this market by any of the following: Iran, Russia, Trump, China, the Democrats, the Fed or half a dozen other boogeymen (boogeypeople?). Yet here we are at the halfway mark and our strategy is doing just fine. Good investing is boring.
I expect a positive reaction from stocks despite a negative reaction from most pundits. I quickly surveyed the usual suspects who are still hard at work explaining why the truce will be bad news. In this case I am seeing Trump critics from both the left and the right. My Twitter list has sources that are even more extreme than you see in this table.
Expect to hear the following spins (including some early examples):
- Trump caved on all the key points (Daily Beast). “…a surrender to publicly issued Chinese demands.”
Fox News Opinion
Senate Minority Leader Chuck Schumer, D-N.Y., made the point Saturday following the president’s obviously successful trip to Japan. Schumer criticized Trump for supposedly giving up “one of few potent levers we have to make China play fair on trade” by agreeing that American companies can sell products to Huawei.
Of course, China isn’t going to enter into an agreement where it gets nothing in return. In any negotiation, you have to give something to get something.
So what exactly did Trump give? As stated by the president: “U.S. companies can sell their equipment to Huawei” but only “equipment where there’s no great national security problem with it.”
- Immediate stock market gains will not last (WSJ).
- Who knows what the President might do next in defending his decision? Does “no deal” constitute a win? (Politico).
- The agreement has no specifics nor a clear path forward (CNBC).
- This is just like the December G20 “truce” which preceded a major stock market decline (Reuters).
- Reducing the trade war risk relieves the need for the Fed to reduce interest rates in July. (Speculation from many sources).
And there will be some bullish spinning as well.
- Immediate relief for the Huawei supply chain. Broadcom (AVGO) had placed the reduction in its own sales at $2 billion. This is just one company, albeit a large partner.
- Immediate relief for some (unspecified) farmers. The President stated that China agreed to large purchases of U.S. farm goods starting almost immediately. There were no specifics and no immediate confirmation from Chinese officials. (Washington Post). (Menzie Chinn).
- Avoiding Chinese retaliation against specific US companies (Fox Business).
I’ll cover my own ideas about the implications in today’s Final Thought.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
Both short and long-term technical health have stabilized at neutral.
The C-Score declined along with the flattening yield curve, but not enough to alter the recession estimate. It still signals the need for watchfulness concerning confirmation from other indicators.
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score”.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.
RecessionAlert: Strong quantitative indicators for both economic and market analysis
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis, especially the regular updates of the Big Four indicators used by the NBER recession dating committee.
James Picerno has his regular helpful update on GDP nowcasts – now holding recent gains at 2.0%. Experts cited are concerned about an increase in the trade war.
Davidson (via Todd Sullivan) has an update on the market’s “intrinsic value.”
The SP500 can rise to 60%-100%+ premium before it is deemed speculatively valued. The premium to the Value Investor Index is highly dependent on market psychology which is relatively pessimistic currently. This can be seen in the 10yr Treasury just above 2% being 60% below the Natural Rate when in previous market cycles 10yr rates were somewhat higher than Natural Rate.
This is not a speculative market. Economic trends imply much higher equity prices once investor pessimism shifts favorably.
Insight for Traders
Our weekly “Stock Exchange” series asked whether traders might be missing the big picture. Drawing upon commentary from Dr. Brett Steenbarger, Charles Kirk, and Nassim Taleb (via Dan Jacob Wallace), we explored the need to put results in a larger context. We also reviewed recent picks from the trading models, showing the frequent contrast with a fundamental analysis. Pulling it all together was our series editor, Blue Harbinger.
Insight for Investors
Investors should understand and embrace volatility. They should join my delight in a well-documented list of worries. As the worries are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.
The day-to-day market still reflects this pattern:
- Algorithms have learned key words and respond to the news or tweet language.
- Human traders pile on, perhaps taking the other side from the computers which are already cashing out.
- The punditry, charged with imposing meaning on chaos, exaggerates the effect of minor news.
- Mainstream media picks up these “reasons” as the story of the day, even if markets move modestly.
- Investors who are observing casually become unduly frightened by the scary news and volatility.
Best of the Week
If I had to recommend a single, must-read article for this week, it would be Joe Wiggins’ The Placebo Effect in Investment. Everyone knows about the placebo effect in medicine – something that makes us feel better without any logical reason for it to do so. He reframes the standard definition to describe the “investment placebo.”
“A beneficial effect felt by an investor by a certain investment activity, which is unlikely to be attributed to the properties of the action itself, and must therefore be due the investor’s belief in that activity”.
What kind of activities might be captured by the above definition (not a definitive list):
– Short-term trading / market timing.
– Trading on macro-economic news.
– Performance chasing in active mutual funds.
And why do certain investment actions make us feel better? He describes an “action bias.”
In the investment industry, it seems irrefutable that there is a preference for action over inaction – amidst the incessant newsflow, erratic price fluctuations and obsession with the latest headline risk, the urge to do something can be irresistible – what if I miss out? What if things go wrong and I have done nothing? How can I just sit here when all of this is happening? What will clients think?
Read the full post for more analysis and the implications.
Chuck Carnevale sees a big bargain in AbbVie (ABBV). Describing how a cheap stock got cheaper, he does the analysis we have come to expect – facts, data, analysis, and an illustration of the F.A.S.T Graphs tool. How did this opportunity occur?
…investors will ignore the enormous danger of overvaluation and flee like rats from a burning building from the incredible opportunity of significant undervaluation. In other words, investors want to buy when they should sell and want to sell when they should buy. Therefore, it has never been a surprise to me that so few people make long-term money investing in stocks. Stocks rarely recover from massive overvaluation and almost always recover from significant undervaluation. Nevertheless, when emotions rule, reason goes out the window.
(See also Barron’s on ABBV).
Blue Harbinger presents STAG’s 4.6% Yield: An Industrial REIT With More Octane.
Marc Gerstein’s screening techniques are at work on REITs. Mr. Market Likes These 10 Good-Yielding Reasonable-Risk REITS. Should You?
Morningstar identifies 10 Cheap Wide-Moat Stocks. There is quite a bit of turnover on the list.
Bhavneesh Sharma discusses his most recent buy, Genocea Biosciences (GNCA). The stock is up over 10% since his post, but still well off recent highs. His ZGNX pick is also up 25% in the two months since he recommended it.
My colleagues at FATrader have launched a new feature – a topic of the week. This week was a good start with Lyn Alden Schwartzer inviting ideas from readers and analysts. This generated many interesting themes and a great discussion. I don’t have a public link for it, but here is a small segment:
Looking 3-5-10 years out, I’m crazy bullish on renewable energy, currently 10% total portfolio. But historically high equity risk has me cautious about throwing more eggs into this basket. Will happily add another 5% if we get an S&P index drop to 2600, and another 5% if we get another visit to 2200.
Any other suggestions for me to research or opposing opinions are appreciated. It’s this site that got the ball rolling for me on this, with most suggestions for research coming from Lyn, Kirk, and PearlGreatPrice. Big thanks.
02.68 BEP … Yield Co. I’m a Brookfield fan, easy choice here
01.93 SEDG … Value
01.89 SPWR … Non string tech has advantages, long runway
01.79 FSLR .. lower risk, utility companies pay the bills
01.79 ENPH .. ASIC micro-inverter (component play).
Enphase isn’t mentioned here too much probably because it’s pricey, but looking at what they reported in Q1 2019, that PE seems understandable. Revenue increases of 47%, 82% surge in gross profit, and operating cash flow increase of 407% YOY to 17 Million.
Thanks Jack for so much detail!
I’m long SPWR and FSLR. I’m indirectly long BEP because I am very long BAM, which has exposure to BEP.
I’ve actually been meaning to pay more attention to Enphase. I covered it briefly in an article last year as a component play but I don’t keep up on the company.
Five stocks that Barron’s thinks could “soar” on a trade deal. Some strange bedfellows.
Davidson (via Todd Sullivan) still likes Smuckers. (SJM). He likes the recent business transition and sees markets as confused by the effect on revenues.
Abnormal Returns always provides interesting ideas on a wide variety of topics. I am a subscriber, and I read it daily. Each Wednesday’s edition includes a post focused on personal finance. There are always several interesting and informative choices. My own favorite this week is Ashby Daniels’ How to Pay for Long-Term Care.
Long-term care is a scary proposition. It’s scary because it means a decline in health to the point that you need assistance. It’s scary because of what it might mean for your spouse’s lifestyle. And it’s scary because it’s really, really expensive.
He goes on to analyze the four basic ways of paying these bills – insurance-based coverage, self-funded, Medicaid, and family care. “Regardless of the strategies you choose, it is important to have a plan.”
I also liked this analysis of the personal economics of cord cutting.
Watch out for…
- Ventas (VTR). Blue Harbinger expects more near-term volatility despite the recent portfolio restructuring. He likes the long-term prospects and suggests how investors might implement his thinking.
- Government bonds – now the “most crowded” market trade. (Jeff Cox, CNBC).
- 100-year bonds? Thomas Hale (FT Alphaville) discusses these developments. [Jeff: If you are going to lend someone money for 100 years, you should be sure they will be around to pay it back. Austria is doing the borrowing at about 1% and it has operated under at least six different regimes in the last century].
The G20 outcome provides support for key themes I have proposed.
Trade wars are costly and painful to all. The worst effects are second-order, and therefore ignored by the average person. I expected the world to get a real-time economics lesson. That is what has been happening.
While I have no insight into the thinking of the President – nor does anyone else – I have expertise in analyzing the forces behind public policy decisions. My repeated expectation has been for normal pressures within the GOP to reach the President. Eventually. GOP candidates in 2020 need to address the specifics of tariff impacts in their states or districts. Key GOP contributors have business interests that are adversely affected by the trade war policies. This is not discussed very much since the actions are mostly behind the scenes.
We now have two specific instances where the worst examples of aggressive tariff policy have been reversed: Mexico and the Huawei decision. Why do you think these changes occurred? The specific concessions that were gained from Mexico and China are not persuasive.
The arguments are not strictly partisan. There is a bear party – one that sells annuities, gold, bonds, and fear.
Extreme spinning has already started. Some sources are so committed to a bearish market take that the facts are malleable.
One example is an “analysis” of the yield curve and the steepening that would occur after a Fed rate cut. The source claims that inversions followed by steepening suggest the worst possible market reaction. (Lance Roberts). You can guess the number of cases and the scale stretching involved in reaching this conclusion!
There are also people citing the IPO “mania” as a sign of froth. They also cite a shortage of IPOs as a sign of weakness.
Or how about small caps? Many cite a big rally there as froth and a lag as weakness. Urban Carmel explains why the latter is a market positive.
What an investor needs to know from the news if far, far different from the politicized interpretations. There is not much that you will read or watch this week that will help your investments. Enjoy some time with your family.
I’ll be at work, but Mrs. OldProf will enforce a couple of holiday days. Our road trip was interesting – nice scenery, people, and restaurants. The fourteen-hour return drive was aided by listening to a mutually selected book. One piece of advice from our experience: Pick a single navigation tool and use it. Dueling navigators can be an issue, especially when the two car occupants each have one.
And also, some longer-term items on my radar
I’m more worried about:
- Iran. Too much brinkmanship increasing the chances for an accident. This keeps getting worse.
- Labor market tightening. This will eventually push wages and overall inflation higher. It may give a deceptive signal of lower job gains. Dr. Ed provides analysis.
I’m less worried about
- Trade issues.