Market Chat: Recent Episodes
Brouwer & Janachowski
Join us for our monthly look at markets, economic data, and news. We share what's caught our eye, why it's significant, and what it means for your investments. Also, please leave a review and ask us your investment questions!
Ep. 118 DECEMBER 2021 Market Update. Topic "Inflation, strains and a three year winning stretch." by Brouwer & Janachowski
Ep. 117 NOVEMBER 2021 Market Update. Topic "The inflation debate takes a new turn" by Brouwer & Janachowski
Ep. 116 OCTOBER 2021 Market Update. Topic "Solid recovery but inflation around" by Brouwer & Janachowski
Ep. 115 SEPTEMBER 2021 Market Update. Topic: "How will the China contagion affect the markets?" by Brouwer & Janachowski
Ep. 114 AUGUST Monthly Market Update Webcast TOPIC: "Delta slows it down" by Brouwer & Janachowski
Ep. 113 JULY 2021 Monthy Market Update Webcast TOPIC: "Is Growth Slowing?" by Brouwer & Janachowski
Ep. 107 "Low rates and record stock markets. But what about 2021?" by Brouwer & Janachowski
Ep. 101 Second quarter was great for investing but bad for the economy. Now what? by Brouwer & Janachowski
Market Chat, December 17, 2019
Topic: Outlook 2020
Image: Sadness of the King; Henri Matisse
Market Chat, November 21, 2019
Topic: Will consumers derail the economy?
Image: Rites of Lililth, 1945 by Mark Rothko
The Days Ahead: Short week and jobs numbers. Market took on a lot. Again. The U.K. suspended Parliament pending the last round of Brexit negotiations. And if that sounds extreme and constitutionally questionable, it is. There was another attack on Fed independence. We think the Fed will weather it all but it's unsettling. Treasuries rallied again but this is very much part of a global trend. Stocks are up on the week but we’re writing this on Wednesday so time for more action.
Meanwhile, before heading out of the office for a break, this is a summary of all the stuff that’s gone on...
Read this week's full market report: https://www.bandjadvisors.com/blog/touching-zero
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The Days Ahead: Fed minutes and lead up to Central Bankers’ Jackson Hole meeting.
Read this week's full market report: https://www.bandjadvisors.com/blog/dusty-recesses
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This is a recording of our August 2019 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
Markets had two things on their mind. One, the G-20 meeting and, two, quarter end rebalancing. What? Yes, rebalancing is a big deal given how many funds (think of all those target dates funds, pension accounts, risk-parity funds) have to maintain their Equity/Fixed Income allocations. After a barn-storming start to the year, with Treasuries up 7%, equities up 14% and similar recoveries in international and emerging markets, many portfolios will have rebalanced in the last week or so.
Outside the technical side, markets are running on low rates, the expectation of lower rates and the hope of a trade deal. Fair enough, but those have been the headlines for months now. We need a new narrative to keep things moving. While 2019 has been good (see below for our mid-year scorecard), we've only advanced some 4% since January 2018 with two corrections of 10% and one of 20%.
Now sit back and enjoy the G-20 meeting.
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This is a recording of our June 2019 conference call. Learn more about Brouwer & Janachowski's wealth management services: www.bandjadvisors.com
Short week. Second estimate at Q1 GDP.
Stocks opened lower seven out of the last 10 trading days. That means stocks sold off overnight in Asia and Europe but then picked up in the U.S. trading day. That shows high-risk avoidance. No one wants to be long overnight and find there’s no volume. Who can blame them? Stocks were down for the week amid trade tensions, weak manufacturing orders and lower oil prices (down 13% this year).
The deflation forces are showing up in a strong dollar and another rally in 10-Year Treasuries. The yield hit an inter-day low of 2.39% (it was as high as 3.2% in October). A 10-Year note trading at $96 back then is now at $104 and that excludes coupon payments. If the slow down continues, trade talks deteriorate and inflation keeps slipping, we would not be surprised to see the 10-Year trade with a 1 handle.
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This is a recording of our March 2019 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
Job numbers. Most of the economic data was weak. That includes the ISM Manufacturing, pending and existing home sales and personal income. But these were all very much expected. The Fed’s move back in January (“we’re patient”) looks exactly right. It's not often that expectations and results are so finely tuned. But this time we knew the tax cuts would run out of steam and uncertainty around China, Europe, trade and government shutdowns would lead to lower numbers. Jerome Powell repeated them all in his talks with Congress last week.
Two points. First, slowing, not a recession. A recession is not two quarters of declining GDP. It’s a far more complicated run of data that includes GDP, employment, claims, hours worked and trade sales (full list here). And those are not flashing red. Second, this should keep rates low for a while. The 10-Year Treasury is at 2.75%, only 20bps higher than two years ago.
It’s been a stunning start to the year. In the first two months, the S&P 500 is up 11.5%, small and mid caps up 15%, China up 27% and Europe up 11%. We'd like to see a pause but would remind ourselves that markets do not correct by going sideways. So having some protection in place seems fine.
As 2009 begins to run off the 10-year returns , we’d like to celebrate that the 10-year compound rate of return in stocks is now 16.75%.
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The Days Ahead: Shorter week. No major economic news.
One-Minute Summary: When the Fed announced it would stay patient a few weeks ago, some tired punters thought, “Aha Trump got to them.” But, the Fed was actually spot on. The economy is weakening (no, not recession). This week we saw a low CPI report at 1.6%, the NFIB (a proxy for small businesses) optimism index plunged, retail sales came in very low and on Friday, industrial production (IP) fell 0.6%. The last one is all about China. As the China index falls, so does the U.S. The business equipment sub-component of IP was down 1.5% and automotive down 15%. That’s all trade war related. The folk over at the Atlanta Fed revised down expected growth for Q4 2018 to 1.5%. It had started at 3.5%.
So growth is slower and one of our favorite Fed Presidents (here she is), reiterated the China, European, Brexit, trade and growth risks and underscored the whole “patient” mode. The 10-Year Treasury traded in a very narrow and bullish range. It’s now 2.67% and yielding only 25bps more than 3-month bills. A year ago, that was 120bps. That’s why we’re in the Treasury FRNs.
Hey, look, it’s all on trade right now. How are the talks going (“great”)? Are there concessions and commitments from the Chinese (probably)? Will the tariffs be delayed (yes)? The market feels a little nervous for sure and most indicators of liquidity are well below 2018 levels. That feels like a market wanting to go up but worried about being caught out. We're still 5% below the ding-dong highs of August but up 11% from the December lows. Again, Small Cap has outperformed by even more and Emerging Markets are up 8%.
For the record, we’d like to see a consolidation. But as we've learned along the way, “rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”
There are lots of problems with government shutdowns. One is that the IRS missed 16 days of tax refunds. So far this year, there has been $21bn of tax refunds compared to $29bn at the same time last year. It may continue. The IRS thinks only 10% of taxpayers itemized in 2018 compared to 30% in 2017. It seems fewer people over-withheld so the normal March-April boost in retail sales may not happen (h/t Cap Eco).
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One-Minute Summary: January was a good month. Stocks up 8%, small company stocks up 11%, international and Emerging Markets up 6% to 9% and bonds trading in a narrow and bullish range.
More data confirmed that China trade talks weigh on people’s mind. The Chicago PMI index dropped from 65 to 56 in a month. We don't usually talk about this index much but it’s Chicago and Boeing is headquartered in Chicago and Boeing sells a lot of aircraft to China…2,000 in all and 1,000 in the last five years at $350m each. So when we look at the New Orders component of the Chicago PMI and see it at a two-year low, we know how sensitive things are to the trade, er, talks.
The Fed announcement (see below) did more to drive stocks than earnings. Earnings were generally good and are up 12.4% YOY. But the hard comp numbers are coming up as 2018 had all the tax cut benefits so analysts are looking at low and perhaps negative growth for Q1 2019. We're not concerned. The market has priced in the slowdown and it mostly comes from energy and tech stocks.
We're also seeing a bounce back from bombed-out stocks. There are 38 stocks up more than 20% this year but the same stocks were down 25% in 2018. This seems a good sign as the market leadership is broader and investors are not just bidding up tech names. The best sector this year has been Energy, which peaked in 2015 and fell 38% to its December low. It’s up 13% since then.
We're in an easy money phase right now. That won't last too long because the data is going to start improving. The market overdid it on the downside in 2018. It may be overdoing it on the bounce back in 2019.
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This is a recording of our January 2019 conference call.
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More Fed speakers should echo Powell’s comments. Inflation numbers out. We're always suspicious of market moves over prolonged holidays. Many traders and investors are away and some markets, like Japan, were only open for three days in nearly two weeks of business. Europe checks out for nearly 10 days. So “small news makes big impact” or “worst day since last one” are headlines you see a lot. This is what we think is going on: 1. Economy weaker but not stopped and not near recession. 2. The inverted yield curve story is overdone but that doesn't stop people talking about it. 3. Volatility is normal. But if you haven’t seen it in a while it feels awkward. 4. The government shutdown, impasse and partisanship should not be a major problem. 5. 2018 was a bad year for multi-asset investors. The only markets not in correction or bear territory are Brazil and India. 6. Earnings and dividends are both likely to continue to grow 10%. There are no major profit warnings. 7. U.S. Treasuries have done well but they may be too pessimistic about a recession. 8. Trade and China are the very big elephants in the room. And will remain so.
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This is a recording of our December 2018 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
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The Days Ahead: Small business optimism indicator. Fed will be in slient mode.
One-Minute Summary: We're writing this the day before the jobs number. This is typically a major data point for traders but we’re not traders and there’s probably no number that would lead us to change our outlook. Why? Well the estimate is for around 190,000 new jobs, compared to 250,000 last month but these numbers are subject to very big revisions…as much as 50,000 either way.
We know the unemployment rate will remain around 3.7%. The only item that may move the market is if there’s a big jump in average hourly earnings. But, if you've been following us, you’ll know we think real wages are unlikely to move much.
The markets had a very busy week. Much of the trading action is prop desks, algos and macro funds closing trading positions towards year-end. It’s not a time to react to headlines. Any view one has is likely to be mown down by stop loss trading. In the last 10 days, we've seen five days where the intraday move was more than 1.5%, six consecutive days of rises and one where the days started very badly and closed up.
Or as Leon Cooperman said “[quant managers] have created a tremendous amount of volatility in the market, scared the public, [and] effectively raised the cost of capital to business.”
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The Days Ahead: New jobs numbers. Unless it’s a shocker, the Fed will raise in December
One-Minute Summary: We never like markets when they depend on a single outcome or announcement. It makes for very nervous trading whenever you hear “markets are waiting on X for direction”. Last week it was Chair Powell on the outlook for rates and, of course, the President on whether there would be progress on trade talks with President Xi. That’s fine. The trade talks are front and center of any discussion about the direction of global trade and economic well-being. But just as these problems took many years to develop, they’re unlikely to be solved over a dinner. We can hope for some sort of delay on the January tariffs. Markets would like that. If it's “no deal”, we would expect risk assets to take a step down.
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Anyone hoping for a quiet week was disappointed. The market suffered a 3.5% two-day loss before recovering on Wednesday. For most investors, this year has not left much to be thankful for. Nearly all asset classes we know have weakened: gold, commodities, large cap, international, emerging, credit and event Treasuries. The S&P 500 is up for the year but by the thinnest of margins. There were no new problems last week nor were there any resolutions to the problems. We'll restate these because they're important and none really lend themselves to quick fixes:
China trade: all eyes on the G20. So far, no breakthrough
Peak earnings: companies may face higher wage bills or just decide not to expand
Economic slowdown: this week it was lower industrial production and soft, but not deteriorating, numbers in housing.
Fed rate hikes: no hint that the Fed is concerned about the weaker economy and will let up on rates
This week also saw another indicator that the Kabuki theatricals on trade are hitting home. Here’s a story about farm produce rotting because of collapsing Chinese demand. And here’s a chart showing declining Chinese import of manufacturing components and the decline of U.S. durable goods orders.
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One-Minute Summary: We, for one, are very glad October is over. See below for what we think has gone on. When all markets correct, we usually find it’s a good idea for the dust to settle and see what has fundamentally changed. As we’re fond of saying, prices change more than facts and the last few weeks have seen investors hitting the sell button and asking questions later.
The markets finished higher for the week but sill had one of their worst months for some time. Earnings were phenomenal with the weighted average growth rate at 24%...that’s up from 19% a week ago but that's what happens when big index weightings like Google, Apple and Facebook turn in 30% to 40% growth rates. The market looks very oversold to us. Expect healthier markets once November elections are done.
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This is a recording of our October 2018 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
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The Days Ahead: Earnings and trade news, especially China as manipulator.
One-Minute Summary: It’s difficult to pinpoint the catalyst for the market sell-off this week. Most of the culprits were known for weeks. Trade, China, rates, tech problems, October seasonals. We knew all that. No central bank said or did anything they hadn't said already.
So what was it? We'd point to two factors. One, technical. There are plenty of algorithm strategies. They see a price break and start dumping stocks to protect the positions. So, when Nasdaq broke its 200-day moving average on Wednesday, a lot of trading strategies kicked off. Don't expect great numbers from quant or hedge funds this year.
Two, rates. Tuesday was also a day when the U.S. Treasuries fell. There were some big Treasury auctions that didn't help. But markets panic when investments meant to move in opposite (stocks and bonds) directions start tracking together. Treasuries rallied later in the week so normal service resumed. We'd also point out that our own “Fear” measures (gold, Yen, Swiss Franc and the 2-Year Treasury) barely moved so this wasn't a wholesale rush to safety.
We think most of the recent 25bp increase in the 10-Year Treasury is catch up. It was clearly over sold and the rally on Friday brought that back to only a 10bp increase. Many investors have played the inverted yield curve story…that, yes, short rates would increase but longer rates would remain anchored because the economy was going to peak soon. We feel that's broadly true but the 10-Year hadn't moved enough to adjust. The economy, after all, will probably grow around 3% this year, which is close to its 70-year average. Yet Fed Funds are at their lowest since 1964.
There was no major economic data. Inflation came in low and consumer confidence dipped a little. We would not consider either relevant to the week.
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The Days Ahead: Fed meets and will raise rates. One-Minute Summary: Stocks reached another record high. We're now up 10.1% for the year and up 15% since the mini correction in February. Small caps have done even better at 16.1% and 19%.
We've seen stocks rotate. That's when stocks that were previously unloved come back in favor. We looked at sectors like Consumer Staples, one of the worst performing sectors, which was down 5% to the end of August but rallied 2.3% so far in September. Tech, the clear winner for most of this year, is down for September.
It’s happening at the stock level, of course. Exxon, the sixth largest company in the S&P 500, was down 4% from January to August. It’s up 6% so far in September. It’s the same story with companies like Caterpillar, Altria, Cigna and some major insurance companies. What this tells us is that prior favorites like Tech and Small Cap are taking a breather or open to profit-taking and lagging companies are having their day. It doesn't change our Small Cap outlook…Tech is different, it’s under some regulatory pressure and much more expensive. Small Caps have a relatively high exposure to REITs, Financials and Specialty Retail…all of which have come under recent, temporary pressure.
The dollar looks like it peaked a month ago. It was up 9% from February but has since weakened against some key currencies…down 4% against the Swiss Franc, 3.5% against the Euro, 2% against the Yen and 3% against sterling. Yes, the dollar has the rate advantage but exchange rates are also driven by confidence, diversification and capital flows. The U.S.’s twin deficits (current account and budget deficit) are heading the wrong way and eventually they’ll show up in the exchange rate.
We don’t think anyone’s winning the trade war. Despite the big numbers from the Administration, the tariffs amount at worst, to $60bn, which is less than 0.3% of U.S. GDP and a drop in the bucket compared to the $220bn of tax cuts coming into the U.S. economy. Because so much of the imports from China are intermediate goods (here’s the list, it’s 195 pages), the costs may show up in higher prices or squeezed margins some months from now. But it won't be big and it won't solve the broader “Made in China 2025” problems.
Also big news: the sector definitions for the S&P 500 will change on September 24. We’ll no longer have a tech sector at 28% of the index. Instead we’ll drop Telecom and have a new Communication Services group. It will bring in some companies which are now Consumer Discretionary, like Comcast and Netflix, and some which are now in Tech, like Google and Facebook and will be around 11% of the S&P 500. Expect some rebalancing trading on Monday.
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This is a recording of our September 2018 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
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The Days Ahead: Second estimate of Q2 GDP and Personal Income.
One-Minute Summary: There are indications that markets are becoming inured to tweets. What would have shattered confidence a few years ago now passes for normal. The noise-to-signal ratio in investments is always high. What seems important at the time, probably doesn't count very much for long term investments. We look at the economic cycle, inflation, earnings and rates. Data on most of those fronts didn't change much.
Stocks had a good week, especially small caps. Emerging Markets were up 2.5% but the news from China (trade) and Turkey (currency) was unchanged. Put it down to summer volumes. The main story was the dollar, which weakened by 1.6%, its worst week since February.
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The Days Ahead: Jackson Hole Symposium, which is often a good source of Central Bank think. Very thin economic reports and corporate earnings season is all but done.
One-Minute Summary: Consumer confidence fell. That surprised some but we think it’s not tied to claims and employment, which are running well. But to wages. I know we bang on about this a lot and there are plenty of others following the same story.
Wage increases are barely positive and we believe even those numbers are inflated by supervisory pay. In other words, non-supervisory employees are seeing negative growth in real wages. There are many more workers than bosses so we think the average number is misleading. And it’s been happening all year. There are plenty of plausible and conflicting reasons why this is happening but none are important to markets right here right now. We'll just leave it that consumer spending cannot sustain a 4% growth rate. Wages aren't strong enough.
Gold was down (it usually drops if the dollar strengthens). The S&P 500 finished mostly higher with defensive sectors (telecomm and staples) ahead. The 10-Year Treasury was up. Economic news was mixed. Slow housing starts. Strong retail sales. Productivity growth stayed around its recent, not-so-great trend. Tesla dropped and Elon Musk apologized.
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The Days Ahead: Earnings mostly over. Productivity report
One-Minute Summary: Strong week for equities with not much to change the tone of good results, modest inflation and economic numbers and a truce of sorts on the trade side.
Tesla said, “enough of this reporting nonsense, we’ll go private”. Then thought about it. Then couldn’t decide. Normally, we’d ignore stocks like these but the company has a record short position and there’s a lot of money at stake proving or disproving the Tesla dream. We raise it because, well, it’s just not good when i) CEOs announce market sensitive news by Tweet ii) there are convertible and iii) regular bond holders to consider and iv) there’s a very convoluted process for buying out shareholders that may just leave them shareholders, if they want. It’s just, you know, not good governance. And they're not the only ones. Call us old fashioned. Here and here have the best take on it and the SEC is on the case.
Berkshire Hathaway (BRK.B) had a good week. It reports on a Saturday to keep the news cycle at bay. One big change was that unrealized gains on the stock portfolio now report through the Income Account. This is a weird rule. Berkshire holds $50bn of Apple stock, which is around 10% of Berkshire’s market capitalization. If Apple goes up, Berkshire now has to recognize that through the income statement. So, in Q1 investments showed a loss of $7.8bn and in Q2, a profit of $5.9bn. You get volatility in return for transparency, I suppose. Some might like that. The core operating business did well and that was mostly what drove the stock up 5% for the week.
The 10-Year Treasury auction went well. As we wrote last week, this was a record amount of $26bn and we were concerned dealers would have trouble placing it all. But no, it was well bid. But it adds to our concern that the yield curve will invert. Meanwhile, the TIPS curve inverted last week for the first time in 10 years. We should note that the yield curve inversion is not a sure recession indicator (see here) but more of a concern that growth will slow. Which we already know from other data.
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The Days Ahead: Big 10-Year Treasury auction. Inflation numbers.
One-Minute Summary: One of those weeks when you think lots of stuff happened, markets must be going bonkers. But stocks had a good week. Earnings continued to do well and of course, Apple, had a strong week. It’s now 4% of the S&P 500 and $1 trillion. It’s an even higher weighting in 8 out of 10 of the largest ETFs, ranging from 4% for an S&P 500 tracker and 15% in the Technology Sector fund (ticker XLK). Not to spoil the party, but we’d remind readers that Altria has been a much better stock since Apple’s IPO back in 1980. One hundred dollars invested in Apple back then is worth $55,000. For Altria it’s $88,000. The slow and steady increase in Altria along with dividends was a better investment than the long no-dividend policy of Apple and the 17 wilderness years. Still, great company and justifies much of the run-up in the S&P 500 in the last few weeks.
Trade was front and center again. The U.S. Trade Representative raised the stakes by increasing tariffs on $200bn of goods from 10% to 25% but not until September. The Chinese shot back announcing yet unspecified tariffs on $60bn of U.S. imports. The U.S. exports around $120bn of goods to China every year so, yes, the Chinese may be running out of retaliatory measures.
There’s a sort of trade truce with the EU right now so expect more on the China trade for a while. If markets seem numb to the trade issues it's because there’s still a big gap between what’s been threatened and what’s been implemented. However, the Yuan/$ rate is getting a lot of attention. The Yuan has weakened by 8% since April, negating much of the effects of higher tariffs. That's one reason why we’re a little cool on Emerging Markets right now and taking protection.
Elsewhere, the job numbers were lower than expected and average hourly earnings didn't move much. The numbers won't change the Fed’s mind on a September hike. The 10-Year Treasury broke through 3% for one day and settled back to 2.95%. If a 3.9% unemployment rate isn't enough to push yields higher, what is? We'd say earnings and wages (not increasing), a better trade deficit (no), more confidence from the Manufacturing and Non-Manufacturing sector (no), more aggressive talk from the Fed (not there either), or higher inflation (see next week but probably not).
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This is a recording of our August 2018 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
Did you like this podcast? Be sure to rate and review us on Apple Podcasts: bandjadvisors.com/itunes Ask us your financial questions in your review and we'll answer them in the next episode. We appreciate your feedback!
Learn more about Brouwer & Janachowski and our wealth management services: www.bandjadvisors.com
The Days Ahead: More corporate earnings. Initial estimate of Q2 GDP.
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One-Minute Summary: There should have been plenty to upset markets this week. The President questioned the level of the dollar and Fed policy, trade tariffs rose again, the EU made a strong trade deal with Japan, housing starts were down, retail sales weak and one of the regional Fed surveys showed that companies are seeing higher prices which they do not expect to be able to pass on (which means a margin squeeze). The yield curve continued to flatten. Netflix had a bad quarter. Yet things kept moving along well enough. Why?
Let’s deal with the first one. The President can criticize the Fed for raising rates but we think Chairman Powell will disregard any and all such comments. He’s going nowhere and the Administration can do nothing about Fed policy. They're stuck with him.
On the others, the market is growing sanguine. The trade pressures are built into the market’s wall of worry for now. Sure, things could get worse but the underlying economy is moving slowly forward and, as we've said before, companies are reporting great earnings. Thank the tax cuts. The path of rate increases is steady and Chairman Powell reassured markets and politicians not to expect policy surprises.
We did see some increase in short-term rates with 3-month Treasury Bills trading above 2% for the first time since September 2009. This was expected. So far this year, the Treasury market has had to absorb $720bn of net new public debt. That’s what happens if you cut taxes in a late-cycle economy. In the same period last year it was -$74bn. Last week, there was $22bn of T-Bill (i.e. 3 month bills) net new issuance and there’s $130bn coming in the next two months. So why aren't rates higher? Because the economy is expected to slow, real wages are flat and because the Fed has clearly signaled where it expects equilibrium rates to settle: not much above where we are.
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The Days Ahead: Quieter week for big economic numbers. Watch for trade and updates on the Eurozone.
One-Minute Summary. When markets crack, we know two things. One, the problems don't come from the last crisis (so no need to look in the MBS world). Two, they come from things you barely notice. Last week it was Argentina and Turkey. This week, it was Italy (see below). U.S. bonds promptly rallied 4.5% and the 10-Year Treasury yields, which many predicted would soar to 3% and beyond, fell to an intra-day low of 2.79%. Bonds got medieval on Tuesday and one Bond King had a very bad day.
Domestic and international stocks and U.S. bonds finished more or less unchanged on the week. But there was plenty of action along the way. Small caps had another good week (they tend to not get riled by trade stuff) and are now some 500bps ahead of the large caps so far this year.
The trade talk is not good. The U.S. went ahead with tariffs on steel from Canada, Mexico and the EU. We don't think they're going to take this one lying down. In past years, the parties would have taken the issues to the WTO and talked about it for a couple of years. This time Cecilia Malmstrom, the very accomplished EU Trade commissioner fired right back with, “When they say American (sic) first, we say Europe united.” So far markets have tended to view the trade talks as bluff followed by climb down. That’s worked. So far. Still, expect a lot more disconcerting headlines.
- Markets are jumpy (Part 2): Here’s something you don't see very often. A G7 sovereign bond crashing in a single morning’s trade. As everyone knows by now, Italy is trying to form a government on a coalition of two parties. The Northern League (secession, pro-Russia, anti-GMO, lower taxes, Eurosceptic) and the 5-Star Movement (guaranteed minimum income, Green, unsure about immigration and mostly Eurosceptic) tried, failed and tried again to form a government. In Italy, winning parties must present their cabinet and government candidates to the President. He has veto power. And he used it. The fear then was another election in the fall with both parties running on an explicit “out-of-Euro” platform because…that’s the only thing these guys really agree on.
Now we've seen Italian governments come and go and, with 42 Prime Ministers since 1945, a change of government in Italy passes as a Cabinet reshuffle elsewhere. And we don't really think this time is different. A government will form, it will make a few changes and it will argue with the EU about debt, growth and bond restructuring.
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The Days Ahead: Jobs number on Friday. Short trading week.
One-Minute Summary. Bonds were up, large and small cap stocks up a small amount and international stocks off around 1.5%...much of that was because of autos (see below), which are around 20% of the German and Japanese stock markets. Emerging Markets had a troubled week mainly because of the bad news coming out of Argentina and Turkey (we talk about it in our podcast here).
There are really two tracks going on in Emerging Markets. One, those countries with high U.S. dollar borrowing, budget deficits and importing oil. Two, those that don't. In the first category are Turkey, Argentina and the Philippines and in the second, China, Taiwan and South Korea. We're oversimplifying, we know.
Right now, there’s a great deal of concern about the former and they're overshadowing the better story from the others. It’s also a problem that a lot of Emerging Market investing is done en bloc, meaning investors buy a single ticker and they're either all in or all out. We think some of this will settle down but in the meantime are looking to protect our Emerging Markets exposure.
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This is a recording of our May 2018 conference call. If you want to join us live next time or get future updates about new episodes, subscribe to our email newsletter: bandjadvisors.com/subscribe
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The Days Ahead: More earnings and jobs numbers.
One Minute Summary: A lot more economic news to feed off this week but not a lot of action. GDP numbers were soft with consumer expenditures and almost every category weaker than the last quarter of 2017. The high point was a build-up in inventories, which makes sense because consumers went on a mini spending binge last year and companies then had to build inventories back up. Anyway, the market yawned as they did with disappointing factory orders and lower home sales.
The S&P 500 was flat. Some oversold sectors like staples and telecomm did well. Europe was mostly flat but we think they're likely to outperform this year. Emerging Markets were flat but off 2% in dollar terms as the dollar rallied, particularly against the Euro. The 10-Year Treasury hitting 3% was not unexpected and soon retraced.
What we’re seeing with earnings is a pattern of selling on the news. Some of the biggest moves this week were companies that reported perfectly fine numbers but gave weak outlooks. Caterpillar (CAT) was a good example…down 9% on multiyear margins and net income. 3M (MMM), Teradyne (TER) and Freeport McMoRan (FCX) were the same. What’s going on? A lack of the next big thing. Earnings are good, economy okay, inflation ticking up gradually. These are all fine but there’s no big catalyst in the wings so stocks are taking a breather. No reason for any portfolio changes.
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The Days Ahead: More earnings and jobs numbers.
One Minute Summary: A lot more economic news to feed off this week but not a lot of action. GDP numbers were soft with consumer expenditures and almost every category weaker than the last quarter of 2017. The high point was a build-up in inventories, which makes sense because consumers went on a mini spending binge last year and companies then had to build inventories back up. Anyway, the market yawned as they did with disappointing factory orders and lower home sales.
The S&P 500 was flat. Some oversold sectors like staples and telecomm did well. Europe was mostly flat but we think they're likely to outperform this year. Emerging Markets were flat but off 2% in dollar terms as the dollar rallied, particularly against the Euro. The 10-Year Treasury hitting 3% was not unexpected and soon retraced.
What we’re seeing with earnings is a pattern of selling on the news. Some of the biggest moves this week were companies that reported perfectly fine numbers but gave weak outlooks. Caterpillar (CAT) was a good example…down 9% on multiyear margins and net income. 3M (MMM), Teradyne (TER) and Freeport McMoRan (FCX) were the same. What’s going on? A lack of the next big thing. Earnings are good, economy okay, inflation ticking up gradually. These are all fine but there’s no big catalyst in the wings so stocks are taking a breather. No reason for any portfolio changes.
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This is our April 2018 Monthly Conference Call.
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The Days Ahead: Big earnings week. First look at Q1 GDP.
One Minute Summary: A quieter week on the economic front but what there was uninspiring. Housing starts were fine but most of the increase was in multi-family housing. Industrial production was up but flattered by energy and mining, which are 20% of the index. We saw new nominees for the four (!) open positions at the Fed. We like them so no drama there.
The S&P 500 was up for the week. Small company stocks, Emerging Markets and International all had a better week and all three are ahead of the S&P 500 year to date. The best market was the U.K. It’s by no means out of the Brexit problems but the stock market has a heavy 22% weighting to mining and commodities, which have been on a roll recently.
Earnings were positive. But the market has distinguished between “bad, good earnings” which would be better net income mostly due to lower taxes and “good, good earnings” which would be better because of margins or volume. In the first camp put Philip Morris and IBM (down 17% and 8%) and in the latter, Netflix and industrial supplier Grainger (both up around 6%). Generally, earnings are having a barn- storming quarter with companies showing 18% annual growth. The 10-Year Treasury rate rose to 2.95% but some of that is because of a heavy refunding week coming up. We don't expect it to continue to rise.
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The Days Ahead: The European long holiday keep things quiet. Jobs number on Friday.
One Minute Summary: We had three out of four trading days where the market moved by more than 1.3%. But there was no change over the week. Bonds had a good week. European markets were up but Asian stocks are still trying to figure out what the trade talks do for them. Companies like Toshiba, Sharpe and Nintendo were down 6% to 8%. The Euro and the Yen took a break from their steady rise this year but that was probably due to some cross-currency funding needs of major banks (the rule on overnight funding changed with tax reform).
Stock volatility feels high. But it's no different from its long-term average. Stocks have gradually got cheaper these last few weeks. We've seen no downward revision of earnings. While the economy is not quite the tear the tax cut crowd thinks, we’re a long way from recessions and economic downturns. Sentiment is shaken but if that flushes out some of the fast money especially at a quarter end, then… good.
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The Days Ahead: Fed meets. Look for any change to their economic projections.
One Minute Summary: Trade issues hung over stocks. The administration lined up China, which runs a $35bn monthly trade surplus with the U.S. It's quite a lot less if services are included but many businesses are annoyed at China’s freewheeling IP (Itellectual Property) transfers. The President asked for a $1bn a year reduction in the trade deficit but given that the deficit is more like $380bn and some 40% of the U.S. total, he probably meant $100bn. As for the new Chief Economic Advisor, Larry Kudlow, I’m hard pressed to remember anyone in that position who had much influence. But he seems like a decent enough fellow.
Small company bank stocks rallied. The Senate passed the snappily titled Economic Growth, Regulatory Relief, and Consumer Protection Act, which raises the threshold for enhanced supervision by the Fed from a $50bn threshold to $250bn. So, that’s nice if you're a Key Corporate, Fifth Third or State Street. You now no longer have to provide a liquidation plan. In fact, only 12 of the 43 banks with over $50bn in assets will come under enhanced supervisory rules. All others get a pass. And yes, they all took TARP.
Bonds rallied. Stocks were lower but small companies had their best two weeks of the year. They're now just ahead of large caps year-to-date. Europe recovered. It seems to be out of the trade crosshairs right now. Japan and Emerging Markets rallied some 2%. The dollar barely moved.
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The Days Ahead: The market is inflation sensitive right now. Tuesday’s CPI number will be important.
One Minute Summary: Mixed economic numbers. Blow-out job numbers (but yes, some caveats). The trade deficit widened, although there may be some relief on the oil side in coming months. Productivity stalled. The Fed’s Beige Book, a report that lives up to its title, was mostly more of the same “modest to moderate” (mentioned 193 times in a 32-page document) growth from the 12 districts. There were some reports of compensation increases but we put that down to state minimum wage increases coming into effect in January. Some 29 states have minimum wages above the Federal level (which is unchanged for nine years) and 18 of them raised them for 2018.
The week started with major concerns on the Administration’s policies but markets settled down mid-week. We're not out of the woods, of course. Thursday’s decision to limit steel tariffs to non-NAFTA partners means those issues now become part of the NAFTA discussions. The ECB said it would keep buying bonds for “as long as necessary.” That weakened the Euro.
Bonds were flat. Stocks liked the jobs number. The S&P 500 and European stocks were up around 3% to 3.5%. We're still 3% down from the market peak on January 26, but up 7% from the lows. The dollar took a round trip…down and then up.
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The Days Ahead: Italy heads to the polls. Non-farm payroll numbers. More fall-out from trade.
Jerome Powell did rather well in the semi-annual report to the House and Senate. His comments were slightly hawkish. Two points stood out.
One, he said that the Fed will “continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2%.” No argument on the second but the Fed’s mandate is employment and inflation not avoiding growth. So, yeah, that was odd.
Two, he said he finds "rule prescriptions helpful”, which is something the Fed has not pursued (thankfully) for the last few years otherwise Taylor rules and Philips curves would have led to much tighter policy.
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The Days Ahead: Second round of Q4 GDP. Italy heads to the polls.
Bonds are grappling with higher expected growth (even though we had some disappointing existing home sales, retail sales and Industrial Production) and the reawakening of the twin deficits story.
For those of you of a certain age, this was a big deal in the 80s and 90s. It’s basically a fear that growth will suck in imports and the, ahem, reformed tax regime won't bring in as much revenue as they hoped because, you know, “tax revenues are going down."
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Please join our investment counsel's live discussion on this week's activity in the markets.
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The Days Ahead: More earnings and some European economic news.
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The Days Ahead: More earnings and so far all good.
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The Days Ahead: More earnings. China GDP for Q4 2017.
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The Days Ahead: Earnings season start. CPI at end of week.
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The Days Ahead: The quietest week of the year. No major announcements.
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The Days Ahead: Japan GDP and U.S. Factory Orders
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The Days Ahead: Slow week. ECB minutes.
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The Days Ahead: Retail sales and NFIB. Surely small business will show better confidence?
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Release date: 11 September 2017
Read the full market report here: http://bandjadvisors.com/blog/bond-tremors-some-etfs-to-avoid
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Read the full market report here: http://bandjadvisors.com/blog/milkybar-kid-is-strong-and-tough
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Read this episode's full market report here: http://bandjadvisors.com/blog/index-flexing
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Alexa, what can I buy? Read the full market report here: http://bandjadvisors.com/blog/alexa-what-can-i-buy
Markets sidelined by politics. Read the full market report here: http://www.bandjadvisors.com/blog-library/markets-sidelined-by-politics
Can this keep going? Read the full market report at: http://www.bandjadvisors.com/blog/can-this-keep-going
Read this full market report here: http://www.bandjadvisors.com/blog/budget-disgrace-markets-dont-mind
What you need to know about market fear. Read the full market report here: http://bandjadvisors.com/blog/market-fear
Market indifferent to politics. Read the full report here: http://bandjadvisors.com/blog/market-indifferent-to-politics
Credit and Jobs. Read the full market report here: http://bandjadvisors.com/blog/credit-and-jobs
It's good to have you back. Read this market report: http://bandjadvisors.com/blog/its-good-to-have-you-back