us unemployment rate 2020

Waiting for the SPX Godot?

By Nikolay Stoykov, Managing Director, Alaric Securities

If anybody had asked me 12 months ago where do I think SPX will be in May 2020 if unemployment in the US, and most developed countries, is near 20% I probably would have laughed it off as a ridiculous question. However, if that person insisted, I probably would have said something like 1000 for SPX and 10000 for Dow Industrial.

US Unemployment Rate April May 2020

On May 24 2019 SPX closed 2826 with unemployment at around 4% and on May 21 2020 SPX closed 2948 with unemployment at least 14% and probably closer to 20%, if expectations for May 2020 are to be taken into account. What is going on here, many people are asking – economic data is abysmal and expected to continue to be bad but markets seem oblivious and actually trading at a higher level than a year ago when economic data was actually quite good…

That is a very difficult question to answer as markets tend to move without giving us a clear explanation why but I believe that the answer/explanation lies in the interest rate environment we are facing. Let’s take a look at some historical comparisons:

In 2000, SPX dividend yield was around 1.1% with 30 year Treasury bonds trading at 5.8%.

In 2007, SPX dividend yield was around 1.9% with 30 year Treasury bonds trading at 4.6%

In May 2019, SPX dividend yield was around 1.9% with 30 year Treasury bonds trading at 3%.

In May 2020, SPX dividend yield was around 2% with 30 year Treasury bonds trading at 1.4%.

It is true that everybody expects the future dividend yield in SPX to be lower than the 12-month historical yield but even with a hefty drop of 30%, which is a lot worse than most expectations, SPX dividend yield will be still higher than the 30 year Treasury bond yield. From a historical perspective, unless there are waves of defaults and SPX dividends are cut by more than 50%, equity markets still offer quite good value relative to government bond yields.

Now with yields so low, I can not help but remember Alan Greenspan’s words – “People buying government bonds here are desirous for losing money” but they are still buying them… Anyway, all I am trying to say is that equity markets seem to be a lot more attractive investment than US government bonds.

In this low-interest rate environment, I feel like the Fed is pushing investors into risky assets and if there is anything I learned in 2009 is that one should not fight the Fed… Here is what I like:

  • Equity Markets – broad cap ETFs like SPY or still distressed sectors like XLE or EEM
  • High Yield Markets – HYG/JNK ETFs, still yielding nearly 7% with a 5-year maturity
  • Hybrid Securities – PFF (preferred stock ETF), CWB (convertible bond ETF)

This is not a recommendation. The information provided is an objective and independent explanation of the matter. Alaric Securities OOD and other entities of the group do not trade in the above financial instruments.


EURUSD trading during coronavirus

Euro to Fall Below Parity With the US Dollar: The Case!

With EURUSD pair making new 52 week low today, one begins to wonder – is this the bottom (time to buy) or are we going lower (time to sell)?

EURUSD March 2020
EURUSD on Monthly Graph

It is our humble opinion that what we are seeing today in the market is the beginning of a dramatic depreciation of the EUR relative to USD.

There are three reasons for Alaric Trader's bearish view on EURUSD:

Coronavirus Spread

  • Europe is a lot more impacted by the new virus. It is our expectation that due to the delayed reaction of Spain, the number of cases in that country could potentially be bigger than Italy.
  • The unorthodox approach, already somewhat abandoned,  by the UK government to seek “herd immunity” to the disease is causing most experts to expect the number of cases in the country to be close to(or exceed) the number in China.
  • It is our expectation that, given the trajectory of the spread of the virus, we can see close to 500 000 cases in Europe in the next 30 days with UK, Spain and Italy accounting for half the cases.

 

Weak Fiscal Response ( Fiscal Irresponsibility)

Given the magnitude of the crisis, the ECB response has been grossly inadequate. The launch of the 750 Billion EUR PEPP is just a fraction of what the situation requires. Alaric Trader professionals believe that the magnitude of the facility should be in excess of 3 Trillion EUR and should include recapitalization of the systematically important banks within the EU.

 

Excessive Leverage in the EU Economy

European interest rates have been negative since the beginning of 2016 or close to 4 years now. During that time the availability of credit has dramatically increased while interest rates have dropped even for the riskiest securities and loans. While we did have the Brexit Crisis in the summer of 2016, overall this time period is best described as smooth sailing.

In a peculiar way, it reminds us of Vasco Balboa, who called the newly discovered ocean the Pacific Ocean just because he experienced balmy weather.

The Pacific Ocean is hardly characterized as balmy just like leverage is not danger-free even if the cost of leverage is zero or close to zero. We believe that many market participants have grossly underestimated how volatile the deleveraging process can become. What our traders are observing in the high yield space in Europe this week is a cascade of margin calls with illiquidity and wild price fluctuations not seen since the 2008 crisis with bonds sometimes trading at 10% discount to their fair market value implied by the CDS market.

 

Given the unprecedented mixture of problems that existed in the European economies even before the pandemic, the easiest way out of trouble, and almost inseparable part of any recovery, is a devaluation of the EUR relative to USD.

In our opinion, it possible to see 15-20% (0.85-0.90 EURUSD) devaluation in the next several months.

This is not a recommendation. The information provided is an objective and independent explanation of the matter. Alaric Securities OOD and other entities of the group do not trade in the above financial instruments.


coronavirus covid-19 affect on stock markets

Coronavirus and the Global Stock Market Shock

According to many experts, COVID-2019 will exacerbate the already expected recession. On Monday, March 9, the world was shaken by an economic shocker. After the collapse of oil quotes, the leading Asian, European and American indices collapsed, and trading in the US was suspended for 15 minutes. 

The oil prices drop led to the first since 2012 gold price increase to $1,700 per ounce. Among the causes of such shocks in the markets, experts call the coronavirus pandemic, in which more than 126 thousand people have already contracted worldwide. Of these, 4,640 people died, and 62,325 have recovered. While doctors around the world are looking for a medical solution to the problem, the business community is anxiously watching the decline in stock quotes and indices.

The world economic crisis was first discussed in the summer of last year. However, it is COVID-2019, according to many experts, that will become the catalyst aggravating the already expected recession. 

Catalyst Epicenter

China is the country, in which coronavirus was first detected, and most patients are there. The fight against the disease forces local authorities to introduce quarantine measures that adversely affect production and business activity. 

China is a significant component of the global economy. And for many companies worldwide, the production processes in China are tied to their own output. Thus, if the pandemic continues and intensifies, it is difficult to name businesses that will not suffer from the upcoming market imbalance. Electronics, engineering products, clothing, raw materials- all these and more industries will experience huge losses.

Chronicles of the Financial Fever

On February 24, the coronavirus officially reached Europe. The pandemic on the continent began with Italy; later, large outbreaks occurred in France and Germany. As of March 2, cases of infection with the COVID-19 virus were recorded in more than 60 countries, 20 of them are European.

The world's major stock exchanges (Tokyo, Shanghai, London, Frankfurt, New York) reacted to this news with a real panic. Key stock indices (Dow Jones, NASDAQ, FTSE, DAX, Shanghai Composite, Nikkei) lost an average of 10-12% in a matter of days. Brent crude for the first time in two years fell to $50 per barrel.

According to the results of the trading day on March 9, world stock indices have fallen to record numbers since the last big crisis. Japanese NIKKEI 225 lost - 5%, British FTSE 100 - 7.7%, German DAX almost 8%. A few hours after the opening, the US market crashed by 7% of the S&P 500.

The “coronavirus” market crash was the largest in the past 12 years: the last time it happened was in 2008; a comparable collapse occurred in the early 2000s with the so-called collapse of the dot-com bubble (a large drop in the shares of technology companies).

Main Causes of the Stock Market Shock

There are actually two main causes of what’s happening in the market. Firstly, it is the fact that Russia and Saudi Arabia launched an oil price war. The result: oil prices fell by 30%, reaching $31.2 per barrel (Brent); later, the price rose to $35. Recall that at the beginning of the year, the price of oil was above $60. Investors ran to sell off shares in energy companies, primarily American ones as many of them would not survive at that price. But not only energy is under attack. Oil is the queen of commodity markets, and such a decline will lead to price adjustments in other sectors.

The fall in prices and the expected sale in the stock markets provoked a tremendous movement of assets. Investors are looking for protected instruments and they traditionally find them in American debt. The demand for US government bonds led to a decrease in their yield below 0.5% per annum, this is another record.

The spread of coronavirus leads to ever greater problems in the economy. According to analysts at Bank of America, the current year will be the worst for the global economy since the global economic crisis ended in 2009. They expect the world economic growth rate to fall to 2.8% by the end of the year. 

The slowdown in the Chinese economy due to the outbreak of coronavirus will lead to this in the first place. The OECD estimated the impact of coronavirus at 0.5% of global GDP. The virus is already in more than 100 countries in the world. And even countries with well-developed medicine cannot stop its spread.


Stock Market up Strongly on Rate-cut Hopes, Optimism over Trade

Powell says Fed will ‘act as appropriate to sustain the expansion’

Stocks were rising Tuesday, with support tied to renewed hopes for U.S.-China trade talks and growing expectations the Federal Reserve will move to ease interest rates.

Key indexes were bouncing back from a loss a day earlier that saw the tech-heavy Nasdaq Composite fall into correction territory on fears of heightened regulatory scrutiny of key companies.

How are stock benchmarks faring?

The Dow Jones Industrial Average DJIA  rose 233.21 points, or 0.9%, to 25,052.99, while the S&P 500 SPX was up 23.18 points, or 0.8%, to 2,767.63. The Nasdaq Composite COMP gained 65.86 points, or 0.9%, to 7,398.88.

On Monday, the Nasdaq dropped 120.13 points, or 1.6%, to 7,333.02 to finish in correction territory, defined as an index closing at least 10% below its recent peak, which for the Nasdaq was a record finish of 8,164 hit on May 3.

The S&P 500 index shed 7.61 points, or 0.3%, to 2,744.45 while the Dow made a comeback to erase a more than 100-point deficit to edge up 4.74 points to 24,819.78.

What’s driving the market?

Stocks maintained gains after Federal Reserve Chairman Jerome Powell told a monetary policy conference on Tuesday that the central bank was monitoring the economic outlook and would “act as appropriate” to sustain the economic expansion.

Powell’s remarks came after St. Louis Fed President James Bullard on Monday said rate cuts “may be warranted soon” amid U.S.’s international trade disputes.

The Nasdaq’s Monday decline was widely blamed on heightened threats that U.S. regulators may reduce the size of tech and social-media companies like Facebook Inc. FB and Google-parent Alphabet Inc. GOOG, GOOGL  for potential violations of antitrust regulations.

Increased scrutiny directed at some of the key members of the so-called FAANG stocks, which also include Netflix Inc. NFLX and Amazon.com Inc. AMZN comes amid growing worries about slowing economic inside and outside the U.S.

Analysts also pointed to remarks by China’s Commerce Ministry, which said “differences and frictions” should be resolved through talks, according to news reports.

Data showed U.S. factory orders fell 0.8% in April. Economists surveyed by MarketWatch had forecast a 0.9% fall.

Which stocks are in focus?

Shares of Facebook extended their decline in Tuesday’s trade, losing 1%, while Google shares edged up 0.4%.

Shares of Uber Technologies Inc. UBER were in focus, as Tuesday marks the end of a “quiet period” during which investment banks that underwrote the ride-hailing company’s May 10 initial public offering were unable to comment on the company. Shares were off 0.9%.

Analysts from SunTrust, BTIG and William Blair initiated coverage of the stock with buy or outperform recommendations.

Tiffany & Co. TIF stock shook off premarket weakness to rise 2.5%, after the luxury jewelry retailer reported a 5% decline in first-quarter same-sales growth.

Shares of Ventas Inc. VTR fell 2.7%, after senior housing and health-care properties company said Monday that it was issuing 11 million new shares to the public at $62.75 per share. The stock closed at $64.15 Monday.

Shares of CVS Health Corp. CVS was in focus after the company said it expects its merger with health insurer Aetna will result in more than $300 million in synergies in 2019 and $800 million in 2020. The company said it would outline a series of measures at an investor day later Tuesday aimed at accelerating growth. The stock rose 3.7%.

What are strategists saying?

“Equities have been supported by some optimism on the trade front and growing expectations the Fed will come to the rescue and deliver a couple rate cuts this year,” said Edward Moya, senior market analyst at Oanda, in a note. “No material progress was made with trade talks, but not seeing additional fallout was good enough of a reason to provide a bid for risk appetite.”

How are other markets trading?

Stocks in Asia closed mostly lower Monday, with Japan’s Nikkei 225 NIK ending the day flat, while China’s Shanghai Composite Index SHCOMP fell 1% and Hong Kong’s Hang Seng Index HSI lost 0.5%. Stocks in Europe were on the rise, with the Stoxx Europe 600 SXXP up 0.6%.

In commodities markets, the price of oil CLN19 was in retreat, while gold prices GCN19 inched up. The U.S. dollar DXY meanwhile, fell slightly against a basket of its peers.

The article was originally published by Chris Matthews and Mark DeCambre at marketwatch.com


Trade Tensions Could Last Well into the 2020 U.S. Election Campaign, Says Nomura

Shutting out trade-war noise, even for long-term investors, looks increasingly like a tall order.

That’s especially true as investors bailed out of global equities Thursday, and sought safe haven assets on the growing realization that the trade spat between the U.S. and China could stick around for a while. That shift in mind-set is at the heart of our call of the day, provided by banking giant Nomura.

“Altogether, the U.S.-China relationship has moved further off track over the past two weeks after a period of what appeared, on the surface, to be steady progress toward reaching an admittedly narrow agreement,” said a team of analysts at Nomura, led by Lewis Alexander, in a note to clients.

“We do not think the two sides will be able to get back to where they seemed to be in late April,” said the analysts, who now see a 65% chance that President Donald Trump will move ahead with 25% tariffs on $300 billion of Chinese products by the end of this year.

“The macroeconomic and financial market impact of the U.S.-China trade conflict thus far has been modest, lowering the threshold for implementing additional tariffs,” it said, adding that the urgency for a near-term deal seems to be fading as both sides dig into their respective positions.

Nomura doesn’t expect tariff escalations between now and June, when Trump and China President Xi Jinping are due to meet at a G20 gathering (Note, they warn the two may not even meet up). But neither do they see tensions easing off, predicting a final round of U.S. tariffs in the third quarter of this year, followed by China retaliation. The bank isn’t alone as JPMorgan Chase has also told its clients to brace for additional tariffs at the end of June.

“Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end-2020,” said Nomura.

 

Neil Wilson, chief market analyst at Markets.com, told clients Thursday that “risks to the downside are building and equity markets probably need to reprice to reflect the heightened risks from the deterioration in trade.”

He said that adjustment for more trade-tension risk could mean lower returns and weaker corporate profits amid some “pretty pessimistic” growth forecast due to tariff worries. “I also think we should note that utilities, real estate and staples [companies that produce goods that are always in demand] have been the big strong performers this year, so that would be a trend to see continue,” Chase said.

Jeroen Blokland, Robeco portfolio manager, said his firm shifted to neutral on equities after Trump’s tweet earlier this month that tipped off fresh trade tensions.

He remains a fan of U.S. stocks because he says they remain a global leader when it comes to company earnings growth, however there’s a caveat: “If there is a meaningful de-escalation or trade deal relatively soon then the anticipated uptick in global growth and hence earnings can continue.

“In this scenario the growth gap between the U.S. and rest of the world is expected to decrease and the U.S. dollar could peak. This will help rest of the world equities relative to the U.S.,” Blokland told MarketWatch.

The market

The Dow DJIA, S&P 500 SPX, and Nasdaq COMP are all trading down as trading kicks off. More coverage in Market Snapshot

The dollar DXY is higher across the board. The euro EURUSD is also down, not helped by weak economic data and European parliamentary elections that are getting underway. Gold GCM19, +0.80% is wobbling and U.S. crude CLN19 is hitting a two-month low.

Europe stocks SXXP are lalso taking a hit, while Asian equities had a weaker session, with Taiwan’s Taiex Y9999 and China’s Shanghai Composite SHCOMP each losing 1.4%.

The chart

Trade spat or not, the S&P 500 is still up a respectable 13% on a year-to-date basis as part of that post-Christmas rebound. But those gains have not been spread so evenly, as our chart of the day from Credit Suisse (h/t The Daily Shot) shows:

Companies exposed to tariffs, such as industrial equipment maker Caterpillar CAT auto maker General Motors GM conglomerates  Honeywell HON and Dow DOW shipping group UPS UPS, and washing machine maker Whirlpool WHR.

The buzz

With all of Tesla’s TSLA troubles, this may be the year that Apple AAPL buys the electric-car maker, predicts analyst. Shares of Tesla plunged another 5% for Thursday, with Consumer Reports taking issue with its Autopilot feature.

The trade spat’s hit on the tech sector appears to be heating up after reports Japan’s Panasonic will cut off some business with Huawei to comply with a U.S. ban on the China tech giant. An under-pressure Huawei told CNBC that it could have its own operating system ready by autumn, if it can’t use Alphabet-owned GOOGL, Google’s.

Meanwhile, official rhetoric remains heated. According to the South China Morning Post, China officials are thinking of ways to reduce dependence on the U.S., such as cutting back on U.S. natural gas buys. And China says trade talks can’t continue until the U.S. “adjust its wrong actions,” Ministry of Commerce spokesperson Gao Feng reportedly said Thursday, according to translated remarks.

The economy

Jobless claims dropped to a near half-century low. Markit manufacturing and services purchasing managers indexes, then new home sales are still to come.

The stat

6,567% — that’s the eye-popping return that could await early investors in blockchain startup Block.one, which include billionaire Peter Thiel. The company is now buying back those shares, meaning a $100,000 stake would earn a lucky investor $6.6 million.

Article and media were originally published by Barbara Kollmeyer at marketwatch.com


Sell the Stock Market in May and Go Away? Not so Fast, Say Experts

It is poised to be the best April for stocks since 2009

 

U.S. equity indexes are on track to register their best start to a year in decades and the sharpest April gains in about 10 years. The solid returns thus far in the fourth month of 2019, however, may raise questions about how gains will shape up in the coming period, as Wall Street focuses on a popular seasonal investing adage.

“Sell in May and go away,” — a widely followed axiom, based on the average historical underperformance of stock markets in the six months starting from May to the end of October, compared against returns in the November-to-April stretch — on average has held true, but it’s had a spotty record over the past several years.

AverageMay-OctoberNovember-April
5 year4.315.53
10 year3.868.67
20 year0.554.89
50 year0.317.56
All-time2.085.13

For one, stocks over the six-month span ending in October have posted comparatively weaker returns in only three of the past five years, with 2017 showing a more than 8% gain, compared with only a 2.8% gain from November of 2017 to end of April of 2018, according to Dow Jones Market Data.

Presently, the period from the end of last October through Tuesday, the last day of April, produced a return of roughly 8.6%, according to FactSet data.

Sophie Huynh, strategist at Société Générale, told MarketWatch that unloading stocks over the coming six months could prove costly for investors.

“It’s not going to work this year,” Huynh said of the sell-in-May strategy.

The SocGen strategist bases her expectations partly on the belief that much of the bad news, including downgrades to earnings, that would ordinarily weigh on markets from May to the end of October have already been factored by investors.

“As I said, the reason why it won’t work is really because EPS [earnings-per-share] growth expectations have been massively revised down. So 2019 EPS growth went from 10% in September 2018, to 3.2% currently, in tandem with the U.S. economic surprise indicator,” she explained.

The Citi Economic Surprise Index for the U.S. hit negative 57.1 recently. A positive reading suggests data are better than expected, while zero indicates data meet expectations, and a negative reading reflects worse-than-expected readings. The index tends to swing back and forth as expectations rise and fall with data trends (see chart below, showing Citi’s economic surprise indicator and S&P 500 P/Es or price to earnings).

 

Still, Huynh said, “we are at this point in the camp of U.S. earnings growth bottoming out, as we think it is too early for an earnings recession cycle.”

She said there is also potential for upward momentum from catalysts like China, which has unfurled a raft of stimulus measures to ease its economic slowdown.

“A lot of bad news is already reflected in expectations, while China’s ongoing monetary and fiscal support and central banks’ ‘Great Retreat’ should put a floor under risky assets for now,” Huynh said, underscoring points she made in a Tuesday research note titled, “Why ‘Sell in May and go away’ won’t work this year.”

The strategist sees the S&P 500 SPX hitting around 3,000 in the near term, which would represent a roughly 2.5% gain from its level Tuesday.

LPL Research’s Ryan Detrick, said that while it is true that the historically weakest six-month stretch starts in May, investors have enjoyed solid gains in six of the past seven years.

In other words, is it worth selling in May when the tendency has been to extend gains, albeit at a slower clip? “Yes, ‘sell in May’ has a nice longer-term record,” Detrick wrote in a note on Monday, “but that doesn’t make it gospel.” (See chart below for historical performance of six-month periods for stocks by month):

 

For even bullish investors, however, it may be hard to imagine stocks ringing up further gains, even modest ones, after the current pace of returns and in the so-called late-stage economic cycle under way.

The Dow Jones Industrial Average DJIA is on pace for its best start to the a calendar year, representing the first four months thus far, since 1999, up 13.7%. The Nasdaq Composite Index COMP is on track for its best start since 1991, up nearly 22% over the same period, while the S&P 500 is on track for its best start to a year since 1987, a gain of 17.1%, according to Dow Jones Market Data.

Both the S&P 500 and the Nasdaq returned to record territory in April as stocks continued a sharp bounceback from a late-2018 selloff.

Mark Haefele, the global chief investment officer at UBS, said that those gains don’t portend a weakening trend.

“Record highs tend to be supportive of, rather than detrimental to, near-term returns. Using S&P 500 price data since 1950, after stocks set an all-time high, their subsequent six-month price return has been 4.7%,” Haefele said in a Monday note.

The data also show that large pullbacks have been less likely after markets have put in records: “The market has just 11% of the time declined by more than 5% over the six months following an all-time high, compared with 18% of the time otherwise.”

But there may be an even more compelling reason to avoid the seasonal shift out of equities at the start of May: trading costs.

Although it is increasingly cheaper to rotate out of assets employing low-fee exchange-traded funds, the taxes and trading fees associated with rotating out of equities and, say, buying bonds, is unlikely to provide a significant investment benefit, according to Simon Moore, chief investment officer at Moola, in a recent Forbes article. He said, “taxes may be a legitimate impediment. This is because gains on the strategy in a taxable account would likely be short-term…”

Article and media were originally published by Mark DeCambre at marketwatch.com


Dow, S&P 500 and Nasdaq Near Records but Stock-market Volumes are the Lowest in Months — Here’s Why

Nasdaq just about 50 points shy of record close, the S&P 500 is 15 points shy, and Dow stands less than 400 points away

 

Stocks are on the verge of record territory, potentially representing the end of a stretch of futility that saw a sharp retreat from the peaks hit in the late summer and fall of 2018.

However, the recent resurgence for stocks after a more than six-month, corrective hiatus has many market participants questioning its durability, as trading volumes remain near the lowest levels of 2019.

“It’s been a bit of a rocking-chair market, in that we’ve been doing a lot but haven’t been going anywhere,” Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, told MarketWatch in a Tuesday interview.

Indeed, Monday’s action marked the lowest full-day, total composite trading volume (representing trading on the New York Stock Exchange and its main affiliates and on the Nasdaq)—roughly 5.7 billion shares—since Sept. 10, according to Dow Jones Market Data. In fact, Monday’s session was even eclipsed by the holiday-shortened Christmas Eve session’s turnover of 5.79 billion shares.

To make a finer point, the rolling 10-day average of total composite volumes are their lowest since Sept. 12 and the volumes are on pace for the lowest monthly average since last August. The average volume for April, if it holds, would represent the worst April since 2013, according to Dow Jones Market Data.

It isn’t entirely clear what those lackluster volumes mean for stocks, with the Dow Jones Industrial Average DJIA, sitting 1.4% short of its Oct. 3 closing peak, the S&P 500 index SPX, 1% short of its all-time closing high, and the Nasdaq Composite Index COMP just 1.4% from its all-time high.

Some make the case that the dearth in trading activity reflects a lack of participation in the market by a broad swath of investors.

“For the New York Stock Exchange, there has been a bit of hesitation to have full participation in the rally…with a decent amount of people on the sidelines,” State Street’s Bartolini said. He said those people who “missed the bounce back [since the December low] are waiting to see what happens on earnings season.”

To be sure, lackluster volumes, which have been trending down for years now, may not tell the full story about the state of the market.

Industry participants also have highlighted that the breadth of the market — the number of companies climbing rather than falling to rent peaks or troughs — has been improving somewhat, as measured by one overlooked metric: the Value Line Geometric Index VALUG, The geometric measure, which tracks the median move of a range of stocks and is equal-weighted, was still about 7.6% from its all-time high hit on Aug. 29, but has been climbing, up about 23%, since its late-December low (see chart below).

 

Source: FactSet

The Value Line is used by many technical analysts as a measure of broad-market participation in rallies or selloffs because indexes like the S&P 500 and Nasdaq, which are market capitalization- weighted, can be skewed by bigger constituents like Facebook Inc., Apple Inc. AAPL, Amazon.com Inc. AMZN, Netflix Inc. NFLX, and Google parent Alphabet Inc. GOOGL, GOOG by virtue of their mega market values.

So, should investors be concerned about low volumes? The jury may still be out.

“There is this debate on volumes. Does it really matter?” Quincy Krosby, chief market strategist at Prudential Financial, told MarketWatch.

For her part, she is looking for volumes to confirm, or disprove, the bullishness reflected in markets of late. “Volume [measures] do help you to confirm the move in the market, particularly when we are looking for signs, in terms of the tug of war taking place [between bulls and bears], and helping investors gauge which side of the tug of war is winning,” she said.

Currently, Krosby espouses the view proffered by BlackRock Inc. BLK, Chief Executive Larry Fink on Tuesday, in that lots of money is still sitting on the sidelines.

That may be exemplified in part by low volumes, which may suggest that gains for markets may have more room to rally, even if indexes are brushing up against fresh records as investors search for a catalyst for further gains. (A reversal of the Federal Reserve’s aggressive path of rate increases and apparent progress in China-U.S. tariff negotiations have been part of the recent bullish narrative.)

Of course, Fink warns that a pile-on from previously sidelined investors may result in a meltup—often defined as a sharp and unexpected rise in the price of an asset class—and that may not end well.

Article and media were originally published by Mark DeCambre at marketwatch.com


It’s Hard to Believe, but the U.S. has Gone Through a Quarter-century of Low Inflation

The last time inflation ran consistently above 3% was 26 years ago

News flash: Inflation in the U.S. has been very low — unusually low — for a long, long time.

How long? Try a quarter of a century. That’s the last time inflation consistently ran above 3% a year.

Stubbornly low inflation is the chief reason the Federal Reserve has backed off plans to keep raising a key interest rate that influences the cost of borrowing for businesses and consumers. And it’s why Chairman Jerome Powell and other senior Fed officials are reexamining old assumptions about how inflation behaves after years of trying and failing to raise prices above what it considers a danger zone for the economy.

“We are almost 10 years deep into this expansion and inflation is still not clearly meeting our target,” Powell said last month. “That’s one of the reasons we are being patient.”

Future of inflation

The thorniest problem for the Fed is figuring out the future path of inflation.

Despite the lowest unemployment rate since the late 1960s and the fastest increase in wages in a decade, the rate of inflation actually fell slightly in the second half of 2018. Conventional wisdom says that’s not suppose to happen when the labor market is what economists describe as “tight.”

The closely watched core PCE price index stood at 1.8% in December, a few ticks below the bank’s official 2% target for a the broader number that also includes food and energy.

The low rate of inflation is by no means an exception, however. It’s now the norm. The core PCE hasn’t topped 2.6% since 1993 — some 26 years ago.

 

“Core inflation has been pretty close to 2% for three decades,” said Sal Guatieri, senior economist at BMO Capital Markets.

Too much success?

The prolonged absence of ruinous price pressures largely reflects one of the Fed’s great achievements: Vanquishing the high double-digit rates of inflation in the late 1970s that threatened to topple the U.S. economy. Even as recently as the early 1990s inflation topped 4%.

The sustained success of the Fed has convinced Wall Street DJIA traders, Main Street business owners, corporate chieftains and American workers that inflation won’t get out of hand again. Employees no longer seek exorbitant pay increases to protect themselves against inflation as they did in the 1970s. Suppliers and producers have had less reason to jack up prices.

The Fed might have succeeded too much.

During and after the Great Recession, the central bank took unprecedented actions to stimulate the economy and lift inflation from potentially dangerously low levels. Only sporadically, however, has inflation risen above the Fed’s 2% target that it considers optimal for the economy.

Hence the Fed’s decision to adopt what Powell calls a “patient” approach.

“Powell has said that our models are not working now,” noted Luke Tilley, chief economist of Wilmington Trust and a former Fed advisor. “He’s essentially said if your models are not working, take a wait-and-see approach.”

The bank wants to see more evidence — clear and overwhelming evidence — that inflation is really heating up before it raises interest rates again.

The Fed’s current benchmark rate sits at a range of 2.25% to 2.5%, up from near zero as recently as 2015. That’s still quite low by historical standards.

“Until the data forces their hand, they have taken a ‘let’s-see-the-whites-of-their-eyes approach,” said Neil Dutta, head of macroeconomics at Renaissance Macro Research. “They could wait a considerable time. It’s hard to see inflation surging ahead.”

Deflated world

If inflation remains subdued, it won’t just reflect the Fed’s past handiwork. Vast changes in the global economy have worked to tamp inflation in the U.S. and around the world.

The era of low inflation began, not surprisingly, just as a technological revolution in the early 1990s gave birth to the modern Internet and sped up the pace of automation. The Internet virtually eliminated vast price disparities in local markets and allowed for instantaneous price shopping while automation slashed the cost of making things.

The entry of China into the global trading system in the late 1990s added more downward pressure on inflation as multinational companies were able to tap into a vast supply of cheap labor and low production costs in Asia.

The devastation wrought by the Great Recession a decade ago has also left its mark. The anxiety and psychological scars from mass layoffs and a wave of business failures keeps workers for seeking higher wages and made consumers reluctant to pay full price for anything.

Companies, for their part, have sought to maintain profits more by cutting costs than trying to raise prices aggressively, lest they lose business to rivals in a highly competitive global economy.

“These forces can last a lot longer,” said Guatieri, who calls the process a tug-of-war. “They continue to keep a lid on inflation.”

What to do in uncertain times

The big question for Fed officials is determining just how long these forces can last.

Based on their forecasts for the economy, they think inflation is likely to remain low for years to come. If that’s the case, Powell’s strategy of patience is likely to guide the Fed going foward. Tilley said Powell has shown a degree of flexibility about inflation that many of his predecessors did not.

“The Fed feels like it doesn’t have anything to fear.”

- Stephen Stanley, chief economist at Amherst Pierpont Securities

Stephen Stanley, an economist who’s often been critical of what he views as the Fed’s lax stance, agreed.

“You can certainly see why the Fed has taken that approach. It’s been a long time since inflation has been above target,” said Stanley, the chief economist at Amherst Pierpont Securities. “The Fed feels like it doesn’t have anything to fear.”

What still worries economists such as Stanley, though, is that complacency will set in and leave the Fed too slow to react if inflationary pressures finally began to build toward troublesome levels.

What would it take to get to that point?

The economy would have to run hot — grow much faster than it’s capable — for an extended period. Workers would have to be more aggressive in seeking higher wages and businesses in trying to pass on higher prices. And the global economy would have to be start growing strongly again, exerting upward pressure on the cost of critical commodities such as oil, steel and lumber.

Eventually that day will come, economists say.

“Just because inflation has remained so low for so long doesn’t mean it will always remain that way,” Guatieri said.

Article and media were originally published by Jeffry Bartash at marketwatch.com


Why an EU Slowdown Poses a Bigger Risk to Stock Market than China Trade

U.S. corporate earnings in Europe hit a record $284 billion in 2018

As investors have kept a laser focus on U.S.-China trade negotiations
and hope that a resolution can give the global economy a much-needed
shot in the arm, at least one strategist says markets may be overlooking
a bigger risk: European economic contraction.

“For U.S. large cap companies, a recession in the EU is a bigger risk” than an unsuccessful resolution to the U.S.-China trade dispute, Joe Quinlan, head of CIO market strategy at Bank of America’s global wealth and investment management unit told MarketWatch. For companies in the S&P 500 index foreign sales have contributed between 43% and 47% of total revenue, according to S&P Dow Jones Indices.

“Europe remains, by far, the most important market for
U.S. multinational companies, with the region accounting for 55% of
global foreign affiliate income,” Quinlan wrote in a Tuesday research
report. He said U.S. corporate earnings in Europe hit a record $284
billion in 2018, up 7% from the year before. Meanwhile, U.S. affiliates
in China earned just $13.3 billion in China, a 1.1% decrease from the
year earlier.

‘What happens in Europe doesn’t stay in Europe.’ Joe Quinlan head of CIO market strategy at Bank of America

“In other words
America’s trans-Atlantic partnership with Europe has proven to pay
significant dividends,” Quinlan argued, with profits from the EU rising
rapidly despite a slowing European economy. “However, rising investment
uncertainty and structural issues throughout Europe could lead to a more
challenging operating environment for U.S. multinationals, which have
long counted on Europe to drive the bulk of their non-U.S. earnings
growth.”

While economic data out of China have been somewhat encouraging of late, European figures have been less so. The German manufacturing sector is contracting, according to Markit’s PMI survey, issued on Monday. Markit data also indicating a contracting French manufacturing sector and a shrinking British services sector, fueled by uncertainty surrounding Britain’s future relationship with the European Union.

Ed Yardeni, president of Yardeni
Research argued in Wednesday research note that these and other data
from Europe run counter to the “widespread view” that it is the economic
slowdown in China which is keeping the European economy down, through
the channel of depressed exports.

Germany’s exports actually rose 1.8% year-over-year to a record high in December, while new factory orders and industrial production during January fell 2.6% and 1.1%, respectively,” he pointed out. The real trouble with German production appears to be the result of tighter EU regulations on carbon emissions, Yardeni suggested.

According to Quinlan,
regulatory burdens are just one of many problems, unrelated to China,
that are weighing down the European economy, including rising oil
prices, a stronger euro, new U.S. tariffs on steel and aluminum and
increased uncertainty over Brexit.

To be sure, there are reasons
to hope that the European economy has bottomed out and will begin to
recover in the coming quarters. Matt Lloyd, chief investment strategist,
Advisors Asset Management told MarketWatch in an interview that the
rally in European and British equities since the start of the year
suggests that markets have priced in all possible Brexit outcomes, and
that major European companies are prepared for those scenarios as well.

Lloyd
said European Central Bank President Mario Draghi “has shown
willingness to do what it takes to support European banks and backstop
the economy.” And even if Europe’s troubles aren’t solely related to
China’s contraction, the European economy will nevertheless benefit from
“the immense amount of stimulus” the Chinese government plans to
continue pumping into the economy in coming months.

Whatever your opinion on the economic health of the EU, it’s important to recognize that its central role in the global economy. “As growth slows in the eurozone, and the UK and EU struggle to find a solution on Brexit, and as political populism gains traction on the continent, at risk are large-cap U.S. corporate earnings,” Quinlan wrote. “What happens in Europe doesn’t stay in Europe.”

Article and media were originally published by Chris Matthews at marketwatch.com