Bull Market About To Get Gored?
The technical health of the markets have gotten nasty in a hurry. Just a few weeks ago, a friendly Federal Reserve and a strong economy seemed destined to pull the Dow Jones Industrial Average to our original target of 30K, “Dow 30K? Yes, but…” (https://markonomics101.com/2019/03/04/dow-30k-yes-but/). Mea Culpa. Maybe.
The stock markets are at the mercy of some very hard to verify news. Trade Deal with China or Not? Now tariffis on Mexican Goods? According to the latest plan, the Trump Administration has threated to keep raising tariffs on Mexico by 5% per month until some progress can be make on stemming the invading hordes of migrants and the undesirables that come with them. Mexico is second to China in trade with the US. Talk of tariffs on imported cars from Europe is just talk for now.
All of the major stock indexes IN THE WORLD look pretty similar to the Dow pictured above. That means a synchronous downturn just may be gathering and with it ONE NASTY RECESSION.
Great Economic News
The US Economy continues to turn out decent numbers. For example, despite all the panic since last fall, GDP has had two straight quarterly rises. Not exactly consistent with big trouble.
Recently, we pulled out the latest trade data and all the hand wringing seemed to have very little impact. Surprisingly so. It turns out that imports grew as buyers of foreign goods front ran the additional costs of the tariffs. But the 1st Quarter of 2019 was not so hot.
Up through March, global trade was still growing slowly and “Trade Deal Optimism” contributed to investor complacency. April fell off a cliff. Global exports fell 2.7% while imports fell 4.0%. That “Trade Deal Optimism” was poorly placed. (https://www.zerohedge.com/news/2019-05-30/not-winning-collapse-global-trade-escalates-imports-27-exports-40).
The robust GDP estimates are acting as a bit of a smokescreen to an economy which appears FAR WEAKER than advertised.
Interest Rates PLUNGE
While GDP number are being reported at solid growth rates of 3%, the entire treasury curve is making low after low. THIS IS EVIDENCE OF A WEAKENING ECONOMY. Some other takeaways are as follows:
- Five Year Treasuries plunged 10 basis points on Friday to go BELOW 2%. The Fed Funds rate target is 2.25-2.5%. Treasuries are mostly BELOW Fed Funds and now inverted for the third time. Calling Jay Powell?
- Ten Year Treasuries closed at 2.13%, also below Fed Funds.
- Thirty Year Treasuries have fallen to 2.57%, barely higher than their all time lows.
- High Yield bonds are falling with the Stock Market. This means that Credit Spreads are widening substantially, making corporate borrowing more expensive DESPITE lower Treasury Rates.
Not all that long ago, we predicted the next move would be a CUT in rates and maybe even two. If the FED fails to keep up with the falling yield structure, a recession becomes highly probable. Jay Powell, despite great credentials, has completely missed opportunities to stabilize the yield curve. Failure to cut rates SOON, with so much debt choking every aspect of the economy, will not have positive consequences. “Global Yields Collapse”. (https://markonomics101.com/2019/03/18/global-bond-yields-collapse/).
Lower interest rates are mostly a good thing. But, in this case, they are SCREAMING GLOBAL economic problems. How much of this is Trade related is not determinable. Clearly, the timing of the escalation is suspicious, but the US exports to China are a mere trickle.
REDUCE RISK FAST
There is more going on than just US China trade tensions. They may be a catalyst, but the market damage is spread throughout. Companies with NO exposure to trade are performing poorly, too.
Check out the chart on the left of the Standard & Poor’s 500, especially the bottom section. This tracks new 52 week highs vs 52 week lows. Note, during the Christmas Eve low, new lows exceeded new highs by more than 100 issues of the 500.
Compare that to the 2019 bull market. Even though the S & P made a slight new high, less than 50 companies made new highs more than new lows. In other words, the decline was broad-based and uniform, but the snapback advance left many of these companies behind. New lows ALREADY exceed new New highs even with the S & P 500 MUCH closer to its highs than lows.
This is BAD. Downside leadership is expanding while formerly advancing sectors are out of gas. Weakening fundamentals are asserting themselves while few companies are benefitting. For a moment, we thought that both energy stocks and banks were ready to give the market some more oomph higher, but they fizzled out. Traders always have to be on the lookout for fake outs and unfortunately these two sectors stumbled. Neither are all that affected by China but rather economic and financial conditions overall.
This is NOT a market to put too many chips on. For example, the charts look just horrible, but news events are unpredictable, sudden, contradictory and often illogical. Trading is treacherous here. Pronouncements from the Administration are constantly changing and unfortunately very unreliable. On the positive side, the President will pull no stops to get the market higher and the Federal Reserve will wake up shortly. If the S & P 500 continues to fall past 15% or so, the Fed’s alarm will go off. Stiff declines are always met with resistance.
But remember this, the market is bigger than the FED. The Fed is not omnipotent and even cuts in rates or other actions may NOT be effective. Europe and Japan are excellent examples. Investors wrongly attribute more confidence in the Fed than it deserves and that reliance may be poorly placed.
Yes, you’re going to hear that another great buying opportunity is present soon. Remember, that’s Wall Street selling. Not Markonomics101. We’re informing.
Be Informed, Not Misled!