Stocks recovered nicely last week, but all eyes were focused over the weekend on the G20 meeting in Buenos Aires. Thankfully, President Trump and Chairman Xi acted in good taste during their dinner session, which, according to press accounts, ended in applause. The elation was a reaction to both leaders acting wisely, accepting a 90-day ceasefire in hostilities, and making one more attempt at finding common ground. A host of new tariffs were to hit on the first of January, but a more accommodative stance is now possible without the associated build up of tensions, at least until 90 days out.
Financial markets reacted positively, as expected. Overnight futures trading bounced ahead, and the opening of the S&P 500 on Monday witnessed a quick upward thrust of 1.28%. After modest short covering for those traders that had guessed incorrectly, the market has pulled back to roughly one half of the earlier gain. The world is a nicer place today, after the world’s two largest economies agreed to work together, but analysts are already looking for something else to worry about.
Before going down that road, let’s start with a quick overview of a positive week’s chart:
The week had started plodding along nicely at a slow upward bent, when Wednesday arrived. Jerome Powell, our esteemed Fed chairman, had spoken at the Economic Club of New York, and, as soon as the speech was released to the press, the fun began. The S&P 500 quickly spiked up, once each paragraph had been parsed to the nth degree. A slight change in Fed-speak emerged — The notion that rates are not too far from neutral, a signal that the Fed may lighten up on a few of the forecasted changes for years in the future. Remember that the fear is that the Fed will slam on the brakes too hard, thereby setting in motion the raging bears of a recessionary pullback.
With that said, there is a subset of the analyst community that tires of every bump in the road being attributed to the actions or public speaking engagements of our Fed governors. The counter view is that, “It is the market that leads and the Fed follows, which means you can just follow the T-Bill action to know what the Fed will do. Yet, so many believe otherwise, and believe that the Fed is all-powerful and controls all. I know many reading this article certainly believe that. Well, maybe we should not believe our lying eyes?”
In this case, the analyst was Avi Gilburt, a respected publisher of his own newsletter and a technician at heart, also provided evidence to back up his claim. The chart bellows illustrates that, from the millennium crossover until just before the Fed began normalizing, Fed rate changes actually were in lockstep with market T-Bill rates, but in an “after-the-fact” manner:
The times today, however, are different, a consequence of the Fed’s long and drawn out policy decisions since the Great Recession hit with such fury. Market forces have been deliberately constrained to such a degree that everyone is predicting dire consequences when and if the so-called “coiled spring” breaks loose from its manufactured bonds. The tension of the spring demands a level of sensitivity to every influencer on the planet, including Fed governors and their propensity to make public pronouncements.
Mr. Gilburt is also an Elliott Wave enthusiast, the reason why he has more faith in what his wave analysis purports, rather than in what an industry pundit might spout after reviewing any Fed member comments hitting the newswires. He sees the present “whipsaw” in his analysis as a condition that will last for months. Volatility and uncertainty, stoked by fears of the unknown, will not dissipate soon.
Basically, there are still three “Big Worries”, if you will, that will keep investors awake at night, in case they are not reveling late into the evening at some holiday celebration. In random order, these worries revolve around the Fed, trade wars, and the late stages of our business cycle, perhaps, the biggest of the three. Financial markets do not stop for the holidays, although there will be a trading pause on Wednesday in the United States, as the country recognizes a national day of mourning for the passing of President George H. Bush.
Why is this week being regarded as “jam packed”?
The solemn tribute in the middle of the week may shorten the reaction time in some investors’ minds, but the week logically breaks down into two parts. The first part is already in progress – Trump and Xi are smiling, their respected staffs are applauding, and no sabers were heard to rattle from the Southern Hemisphere after the weekend’s long awaited dinner meeting at the G20 summit. There is now a 90-day delay to work out a few details, one of which is increased importations of U.S. goods by China. Trump must alleviate the growing trade deficit pressure between the two countries, and tariffs are not the answer.
With the threat of an outright trade war lessened, the attention swings back to the Fed. Jerome Powell’s testimony before Congress must be re-scheduled due to the funeral on Wednesday, but the Fed’s upcoming meeting in a few weeks will give everyone something to ponder about in the interim. The probability of an upcoming rate hike of 25 basis points had slipped recently down to 75%, but, based on recent speeches, it has risen again to 84.4%, as of today’s reading of data in the futures market.
As for the week ahead, Marc Chandler, a heavily followed market and forex analyst, summarized the action to come as follows: “The week ahead may be among the busiest of the year. There are important events every day that will shed light on three drivers of the ever-evolving investment climate, slower growth, softer prices, and trade tensions.”
Although the underpinnings of the economy are strong on many fronts, all is not perfect by any means. There are general slowdowns in many areas. Mr. Chandler cites the following details related to slowing growth dynamics:
- The IMF revised down its forecast for world growth.
- Late last week, the S&P increased the probability of a US recession in the next 12 months to 15-20% from 10-15%.
- Sweden and Switzerland joined Germany, Italy, and Japan to report contracting Q3 GDP.
- The recent official PMI from China suggests either new efforts to support the economy have not been implemented or are not having an impact (yet).
- At the end of last week, India reported its growth slowed more than expected in Q3 to 7.1% year-over-year from 8.2% in Q2.
- Brent is off 31% over the past two months, and WTI has fallen almost 33%.
- The US October PCE deflator eased to 2.0%, but the core eased to 1.8%.
These factoids are but a few of the more standout items. It is not difficult to look about to find areas of concern, too. New home sales are discouraging. Rail traffic is slowing down. Initial jobless claims are rising. And, to round out the theme of an economic slowing, we have consensus forecasts for the 4th quarter GDP growth moderating back down to the 2.7% territory:
Jeff Miller, another market analyst with a huge following, believes that the late stages of the business cycle may be the largest worry in the minds of investors: “The business cycle worry — This may be the largest effect of the three. The idea that we are at the late stages of the business cycle has become commonplace conventional wisdom. Assorted pundits are throwing out predictions for a recession in 2020 – as high as 60%.” This worry has definitely been around a while, and perceptions of its potential effects will not change any time soon. Miller freely admits that, “The latter stages of an economic cycle, like the one we are in now, can last for several years.”
No matter how good the current data appears, there have been several negative types that have been beating the recession drums for the past two years. Sooner or later, these purveyors of doom will get it right, but the opposing opinion is winning today: “A long, slow recovery, like the one we had following the credit crisis, can give numerous signals as it matures. We have been experiencing that. Given the corporate profit picture, relatively low interest rates, modest inflation and strong leading economic indicators, it is hard for me to see what has the Recession-nistas all worked up.”
Analysts now fear an impending S&P 500 “Death Cross” – What is that?
If the primary worries embedded in the general narrative are not convincing enough, then you can always count on a technician pointing out that a particular chart indicates that doom and gloom are just around the corner. A good example recently was the potential inversion of the Yield Curve, declared to be our best predictor, bar none, of an imminent recession within the next twelve months. A plethora of articles were devoted to following every dip and rise of interest rate margins from all sorts of securities, but the prophecy never materialized, nor could anyone explain why it was so accurate.
The latest “chart fear” comes to us by way of iMarketSignals, a firm known for its accurate model for tracking economic data and making reliable predictions related to the potential threat of a recession. In this case, the headline read: “Countdown To The 34th S&P 500 Death Cross – Update 12/2/2018.” When these people speak, people tend to listen. They presented the following chart to support their concerns:
Simply put, a “Death Cross” occurs when the 50-Day Moving Average crosses the 200-Day Moving Average. There have been 33 of these since 1950. Unless there is a material rally in the S&P 500, then according to these folks: “The Death Cross is inevitable, and will occur before December 13, 2018.”
What have the repercussions been in the past? Per the firm: “Based on past history of the performance of the S&P 500, there is no need to panic.” There may not be an immediate downturn in the market, but historical odds are heavily weighted against your making profits in the market over the two months following a “Death Cross”.
The current week will be interesting, to say the least, as it unfolds until its concluding statement – the Non-Farm Payroll Report on Friday. Outside of Wednesday, each day should provide a number of opportunities for gain, as volatility perks up market activity. Prepare your trading plans accordingly, happy trading, and Happy Holidays!