THE WEEKLY TOP 10
Table of Contents:
1 As expected, President Trump blinked first (but earlier than I thought).
2) With the Huawei news, the upcoming action in the semis will be KEY.
2a) The “trade truce” should move attention back to growth (EPS growth in particular).
3) The “trade truce” should also have an impact on how aggressive the Fed will be.
4) A “meaningful” break above the old highs will be quite bullish for the stock market.
5) If you’re looking for any upside from a “trade truce,” look at the Chinese stock market.
6) Natixis….another sign that investors should stay in liquid assets.
7) The action in the Treasury (& more recently) gold is also a warning signal.
7a) Credit spreads are frequently a coincident indicator, not a leading one.
8) Speaking of gold, its recent pullback could/should last a bit longer, but…
8a) An updated look at the chart on the DXY dollar index.
9) If the Fed has the market’s back, it also has Trump’s back (whether they like it or not).
9a) That’s not an opinion on whether Trump should be re-elected. It’s just the way things are.
10) Housing stocks seeing cracks (to go along with some weak data).
10a) (The housing stocks were an excellent leading indicator for the broad market last year.)
11) The bank ETFs are testing some key resistance levels.
12) Summary of my current stance.
1) I have said all along that (despite what many pundits have said), President Xi was in a better negotiating position than President Trump. Sure enough, Trump blinked first (and it came a bit earlier than I thought it would). He delayed the next round of tariffs & relented on Huawei without getting very much in return. Therefore, President Trump has discarded one of his most potent bargaining chips…and thus the situation has shifted significantly in China’s favor…….There must be a lot of happy faces in Beijing this weekend.
2) What does this mean for the stock market? Well, I believe that a “trade truce” was already priced into the stock market…with its 7% rally in 4 weeks (and 25% gain since late Dec). However, this news (on Huawei) is quite favorable for the semis. If this leadership group can rally to new all-time highs, it’s going to be VERY bullish for the broad stock market…..However, this kind of reaction is not a lock. The fundamentals for the group were deteriorating before the trade talks broke down & before Trump’s ban on Huawei. The SOX semi index is still more than 8% below its April all-time highs, so once the dust settles, we’re going to have to see if the semis can rally a lot further…or if the slowing global economy keeps the SOX from bouncing in a significant way. (Charts attached below in the "Long Version".)
2a) In other words, with the “trade truce” in place, the focus for investors is going to move back towards global growth, U.S. growth, and domestic earnings growth. Given that growth is slowing & earnings estimates are coming down for the S&P 500 (and both were weakening BEFORE the trade talks broke down), the upside potential for stocks might not be all that high. With the Citi Economic Surprise Index back to its April lows…and full-year S&P 500 earnings growth now at only 2.8%...one has to wonder if these readings are strong enough to justify a sizeable further advance to the 17% gain we’ve already seen in that index so far this year. (Chart in the "Long Version)
3) This brings us to the Fed. The expected July rate cuts have fueled much of the June rally. However, now that we have a “trade truce,” it raises questions about how aggressive the Fed will be this year. When you combine this with the fact history shows that “rate cuts” do not have anywhere near the same aggressive & immediate impact that QE programs do…and it raises questions about how much the Fed’s actions will help the stock market rally going forward.
4) Having said all this, there is no question that if the S&P can break meaningfully above its all-time highs, it’s going to be very bullish for the stock market. However, the bulls HAVE to guard against another “head-fake”…since each of the last three record highs indeed “head fakes”…and were followed by serious declines in the stock market…….3,000 is a nice round number, but I’d like to see a 2%+ break of the old highs (3% would be even better) to confirm a break-out has indeed taken place. If (repeat, IF) a “meaningful” break-out takes place…”momentum” and “FOMO” will play a key role in taking things higher. (Chart below)
5) If investors want to bet on some upside movement in a stock market from this “trade truce,” they should be looking at China’s stock market!!! Both the U.S. & Chinese stock markets were hit pretty hard after the talks broke down in May…but the U.S. has bounced back much more strongly. This should give their market more upside potential…especially since it just broke out of a sideways range last week (and since their side did not have to give up very much at all). (Charts below)
6) I'm surprised that the blow-up at Natixis is not getting more attention. This is the third time in less than a year that a large European fixed-income investor has run into severe problems with their illiquid securities. When things like this begin to become more than just one-off incidents, it raises serious questions in my mind. When problems like these become more widespread, the selling usually moves from illiquid assets…to liquid ones eventually.
7) This goes back to the divergence between the stock market & other markets. There are several reasons for the moves in the Treasury & gold markets, but at least some of these moves have got to be a “flight to safety” move (since we’re not in a recession & inflation is non-existent). When you combine this “flight to safety” warning…with the warning we’re getting out of Europe to move into liquid assets…and it is a scarier recipe than most people are contemplating right now. If the stock market falls hard this year, we won’t be able to say that several other markets did not warn us.
7a) Don’t use the fact that tight credit spreads remain tight as a reason to think the above-mentioned warning signals are nothing to worry about. As we have learned over the last two years, the widening of credit spreads frequently does not take place until after we feel some duress in the stock market/economy. In other words, credit spreads are frequently a coincident indicator, not a leading indicator. (Chart below)
8) My calls in gold (in both directions) have worked out very well…as the yellow metal did indeed fall $40 after we said it had become ripe for a pullback in our most recent call. It has worked-off some of that condition, but it’s still quite over-bought. Therefore, I want to stay on the sidelines right now. A drop back to its “old resistance” level of $1,380 should create a great buying opportunity…..Either way, if it breaks back above its highs from last week (of $1,440)…whether now or after more of a “breather…it will confirm a break-out in the yellow metal.
8a) Let’s update the technical look on the DXY dollar index. After breaking below its 200 DMA the previous week, the dollar held in a VERY tight range. So nothing was resolved last week, but how the dollar acts in the first few weeks of July should be QUITE important. If it can regain its 200 DMA, it will be bullish (and bearish for EMs & commodities). However, if it falls further…especially if the DXY breaks below the critical support levels we highlighted last week (of 95 and then 94), it’s going to be quite bearish for the dollar…(which will be rather bullish for those other asset classes). (Charts below)
9) If the consensus is correct about the Fed…and they are going to cut short-term rates in July no matter what the data is…or what happens in the markets…that will confirm that they are engaging in an “insurance” rate cut. It will also indicate (confirm) that the Fed “has the market’s back.” It will also mean that they have President Trump’s back as well…whether they like it or not.
9a) I am not trying to make a political comment with this last statement. I am NOT trying to say whether we believe that President Trump should be re-elected or not. I'm merely saying that if the Fed helps the stock market rally with by their actions (which will probably take a QE program to succeed)…no matter what the reasoning is behind those actions…it will help the President’s re-election bid. I'm not trying to say anything more or anything less.
10) The housing industry has seen some pretty weak data recently. This is not the first time this year this has happened, but it IS the first time it has coincided with some cracks in the ITB home construction ETF. The ITB broke below its trend-line from Q4 in May…and then went right back up and retested it in mid-June. However, it then rolled back over again. It’s still going to have to fall further before we raise a warning flag on this important economically sensitive group, but its something I’ll be watching very carefully going forward (especially since a break-down in this group was an excellent leading indicator for the broad market last year).
10a) If (repeat, IF) the housing stocks do indeed break-down, it would also raise a yellow flag on the broad market as well…as the ITB was a good leading indicator for the major averages last year. The ITB topped-out in July…and fell 10% BEFORE the broad market topped-out at the very beginning of October of last year. (Chart below)
11) The bank stocks had a good day on Friday…after the results of their stress tests became public…and many of them raised their dividends and increased their share buybacks. This enabled the KBE & the KRE to climb very close to the top-end of a sideways range they had been in over the past month…as well a near the top line of a “symmetrical triangle” pattern. Therefore, if (repeat, IF) they can see some upside follow-through as we move into next week (and through July), it should finally give the bank stocks some upside momentum. (Charts below)
12) Summary of my current stance……I always like to present issues from both sides of the bull/bear ledger…and there is no question in my mind that a meaningful break above the all-time highs in the S&P 500 will be quite bullish for the stock market. However, I don’t think it is a lock that they will. Even before the break-down of the trade negotiations, both global growth & domestic growth were already slowing…and earnings estimates were coming down....…However, the markets are still very much dependent on liquidity. The problem is that most people seem to be equating “rate cuts” with “QE programs.” However, history tells us that rate cuts do not have the same kind of direct and immediate impact that QE programs have. Therefore, assuming that a 25 basis point rate cut will have the same impact that the initiation of a QE program has had in the past ten years…is a mistake in my opinion……..Therefore, when you combine our stance is that a lot of the “trade truce” has already been priced into the stock market…with the slowing of both economic growth & earnings growth…with the fact that the Fed looks like it is going to engage in rate cuts, rather than the more aggressive QE programs…I am going to have to wait to see the stock market break above its old highs in a significant way before we can turn more bullish on its upside potential for the stock market.
1) Despite what many pundits have tried to portray, I have said all along that President Xi was in a better negotiating position than President Trump. Very simply, Xi does not have to run for re-election…and his country has the political wherewithal to withstand a slowdown in economic growth that Trump & the U.S. do not have. Sure enough, President Trump has blinked first (and it came a bit earlier than I thought it would). He delayed future tariff increases (which was widely expected…and priced-into the stock market in our opinion), but he also relented on Huawei without receiving anything in return from China. Therefore, President Trump has discarded one of his most powerful bargaining chips…and thus, the situation has shifted significantly in China’s favor. President Trump got very little in return. (China had already been promising to buy more ag products for some time now.) The White House will try to say it was a “win/win” for everybody, but it was President Trump who definitely blinked..……..There must be a lot of happy faces in Beijing this weekend.
2) What does this mean for the U.S. stock market? Well, after a 7% rally over the past four weeks and a 25% rally since late December, I believe that most of this “trade truce” (the delay of the increased tariffs) has already been priced-in. Yes, the market should see an initial pop, but whether it sees any upside follow-through after that initial pop will probably come down to the action in the semiconductor stocks….because the news that U.S. firms can sell to Huawei once again was not necessarily expected. Believe it or not, it’s not a slam-dunk that a semiconductor rally will have legs as we move through the summer. Yes, they should see some strong gap openings next week, but we have to remember that demand and pricing for the semis were already weakening before the trade talks broke down and before the Huawei ban put in place by the President in May. Therefore, a strong rally to new highs for this crucial leadership group is not assured…..The SOX semi index is still more than 8% below its April all-time highs, so once the dust settles next week, we’re going to have to see if this group can maintain its recent upside momentum…or if the slowing global economy keeps the chip stocks from bouncing in a significant way.
2a) In other words, with the “trade truce” in place, the focus for investors is going to move back towards global growth, U.S. growth, and domestic earnings growth……….Given what I highlighted about what was going on with the outlook for the semis BEFORE the trade tensions increased, I'm not so sure that the upside for the group…and thus for the broad stock market…will be all that strong. This is particularly true given the fact that the U.S. economic data has been coming-in weaker than expected recently…as seen by the drop in the Citi Economic Surprise Index down to its late April lows (just before the market fell 7%-10%...depending on the index)…….It also ignores that future earnings estimates continue to come down. Consensus estimates (according to FactSet) are now for slight declines in Q2 (of -2.6%) and in Q3 (of -0.3%)…and only a mild increase of 6.7% in Q4. (Q4 estimates had been in the double digits just a couple of months ago.) Therefore, the consensus full-year earnings estimate for the S&P 500 is now just +2.8%!!! One has to wonder if that is the kind of earnings growth that will justify a sizeable further advance to the 17% gain we’ve already seen in that index so far this year.
3) This brings us to the Fed…because the assumption that they’ll cut rates in July has been the apparent catalyst for the rally from the early June lows. With the new “trade truce”…and the fact that President Trump has caved-in on the Huawei issue…the odds that we’ll get a rate cut should undoubtedly come down some-what. The odds might not fall very much for a 25 basis point cut in July, but this new-news should take the odds of a 50 basis point cut down to a very low level…and lower the odds that a second trade cut will come as quickly as the stock market is pricing in right now as well……Besides, as I have highlighted in recent pieces, history tells us that “rate cuts” do not have the same kind of impact on the markets as “QE programs” do…in terms of time and forcefulness. QE programs have a direct and immediate impact on the markets…while rate cuts take a while to stimulate both the economy AND the markets. In fact, the “first rate cut” is frequently followed by a decline in the stock market, not a rally. Therefore, a reassessment of the impact the Fed’s dovish pivot will have on the stock market should be in order over the coming days and weeks…and that could dim the hopes that an extended rally will take place going forward……(We’d also note that there was an interesting article in the “Streetwise” column of Barron’s this weekend. It basically said that the “Fed put” will not work as well as it used to. Their argument states that when rates are as low as they are now, they can only cut them so much. Therefore, the cost of buying something on credit…like a house…really doesn’t fall very much. Thus, rate cuts from low levels are not as simulative as ones from higher levels.)
4) Having said all this, there is no question that if the S&P can break meaningfully above its all-time highs, it’s going to be very bullish for the stock market. The keyword in the last sentence, is “meaningfully”…because the S&P has broken “slightly” above its all-time highs three other times in the previous 18 months…and each time it rolled back over rather quickly…and then fell in a serious manner. For me, that level will be something above 3,000. Yes, I would love to use that big round number as our crucial level, but I like to see a break above a critical resistance number of 2% before we can call it “meaningful.” (3% would even better…since the September 2018 high was 1.98% above the Jan ’19 high, but a move of 2%-3% above the April highs would do the trick.) 2% above the old highs would be 3013…and 3% would be 3030, so we might be mincing levels with this comment…but it’s safe to say that if the S&P moves much above 3,000…and stays there…it’s going to be very bullish………..This could be a bit frustrating to determine over the very near-term…with the holiday-shortened week next week. So we’ll probably have to see it break above that level…and HOLD above it into the following week (when the markets won’t be so “thin”) to confirm a break-out if (repeat, IF) the S&P moves above the 3,000 level. However, if it can, it could/should lead to some more “FOMO buying” (on top of the “momentum buying”). The reason that this could be more pronounced than usual is because it’s the beginning of a quarter. Nobody in the institutional business wants to give-up ground at the beginning of a quarter, so they’ll be some-what forced back into the market (or should we say further back into the market) even if their longer-term opinion is not overly bullish.
5) However, if investors want to bet on some upside movement in a stock market from a “trade truce,” they should be looking at China’s stock market!!! Heck, while the U.S. stock market has bounced-back and retested its April (all-time) high, China’s Shanghai Index still stands 10% below ITS April highs (which are still more than 40% below its 2015 all-time highs). Therefore, since the Shanghai Index has retraced a MUCH SMALLER amount of the decline that took place after the trade talks broke down two months ago than the U.S. market has experienced, it would seem to us that Chinese stocks would have more upside potential if all we get is a “trade truce”……Of course, the trade negotiations are not the only thing that has an impact on either market, so we don’t want to say that all things are equal right now between these two stock markets. However, there is another reason to be more bullish on China if we get a “trade truce” (especially since Xi didn’t have to give anything up to achieve the “truce”)…..Looking a the chart on the Shanghai index, it shows that it recently broke above the sideways range it had been in for six weeks. So if it can rally a bit further, it could/should regain the kind of upside momentum that will take it back up near its April highs (assuming the “truce” doesn’t quickly break-down)……..Investors looking to take advantage of any potential rally in China should take a look at the FXI China Large-Cap ETF. It has also broken a short-term sideways range…and this ETF is very liquid……..……It just seems to us that if you think we’ll get a lot more upside movement after the G20 meeting, the FXI should have more upside potential than the SPY.
6) I am quite surprised by the lack of focus on Wall Street to the blow-up at Natixis. This is the third prominent European investor to run into serious problems due to holding a lot of illiquid (mostly corporate) debt. Unlike GAM & Neil Woodford, Natixis did not have to freeze their fund from withdrawals, but the debacle they faced still shows how today’s markets do not have a lot of liquidity……..I'm obviously not talking about central bank liquidity. I'm talking about the ability to buy and sell securities! More importantly, the ability to sell securities in times of market stress. It might be a stretch to say that these mini-crises are reminiscent of when Bear Stearns had to close a couple of their funds in 2007, but the fact that we’re seeing several similar incidents in the European debt market concerns us. Whenever you get a situation when there is not enough liquidity to satisfy the selling that is taking place…and this selling becomes broader-based…it results in selling in other markets. In other words, when investors cannot raise the money they need, they end up selling assets in other markets to make up the difference. Whenever we see a recurring theme of “forced selling” in any particular market (like we’re seeing now to those European firms)…it usually signals that a bigger debacle will hit the system eventually.
7) This goes back to an issue I’ve been harping on for a long time now…and a lot of others have been highlighting in recent weeks as well: the divergence between the stock market and other markets around the world. We have the U.S. 10yr yield at just 2.0%. You’d think we were in a depression (or at a recession at the very least) with those kinds of readings for long-term yields! Therefore, it’s not a stretch to think that at least some of those investors are buying Treasuries in a “flight to safety” move. (Yes, they’re also buying them because Treasuries compete well with all of the global sovereign debt that has negative yields on them. But what do those negative yields tell you about the state of affairs in the world???).......On top of this, we have seen a break-out in gold! (More on this in point #8.) There are few (if any) signs of inflation in the system right now, so it’s a good bet that at least some of this break-out in gold is also due to a “flight to safety” move by investors…….In other words, we have a situation where two important markets are signaling danger ahead…while a third market (the corporate bond market…discussed in point #6)… is telling investors that investors should be moving back towards more liquid assets. All of this is taking place with a stock market that is within a whisker of all-time record highs……Therefore, if the stock market DOES see some acute distress at some point this year (like we saw in Q4 of last year)…for whatever reason…we will not be able to say that there weren’t any warning signals.
7a) I know, we know…credit spreads are still quite narrow. However, as I highlighted back in early May, credit spreads are frequently NOT always a good leading indicator for future stress in the system. They tend to be a coincident indicator on many occasions, not a leading indicator!!! As I reviewed seven weeks ago, we did not see any significant cracks in credit spreads before the stock market began its 10% correction in early 2018 or before the 19% correction of the 4th quarter (or in the 7%-10% pullback we experience in May…depending on which index you chose). In all of those cases, credit spreads began widening out...and the high yield market rolled-over...AT THE SAME TIME stock market began to decline…..I readily admit that widening credit spreads and a weaker high yield market DID take place in advance of the stock market correction of 2015/16, but there is no question that history tells us that a benign junk bond market and/or a lack of a widening of credit spreads…does not guarantee smooth sailing in the future.
8) Speaking of gold, my calls have worked out very well recently. (I just dislocated my shoulder patting myself on the back!) I said that any break above the $1,380 level would be quite bullish…and it was indeed followed by a quick run to $1,440. However, I then said (on this past Monday) that gold had become extremely over-bought and over-loved…and, therefore, it had become ripe for a decent-sized pullback. I sighted the extreme levels in both the daily AND weekly RSI charts…as well as extremes in some of the sentiment readings we follow…and said that long-term investors should not chase it…and short-term traders should take profits. Sure enough, the yellow metal declined $40 over the next few days……Ok, that call has worked out very well, but the $64,000 question is, “what’s it going to do next”???......Well, gold has only worked-off a small amount of its over-bought condition (on both its short-term and intermediate-term charts). Therefore, I think that both investors AND traders should stay on the sidelines right now. Any break above this week’s early highs will be very positive, but I think gold will have to back and fill further before it can rally further to a substantial degree……If the “breather” in gold becomes a more profound decline, we’ll be watching that “old resistance” level of $1,380. “Old resistance” becomes “new support”…so we’ll be waiting to see if it holds that level over the coming days and weeks. It does not HAVE to go back down and retest that level, but any decline back down to that level could/should provide a GREAT opportunity to get long gold at some point over the summer months. Either way, if it breaks back above its highs from last week (of $1,440)..…whether now or after more of a “breather..…it will confirm a break-out in the yellow metal on a longer-term basis and also confirm that the long-term trend in gold has changed to a bull market.
8a) As I’ve been saying for a while now, the movement in the dollar should have a significant impact on the price of gold. The weakness in the dollar is now getting more attention around the Street, so I’d like to update the chart on the greenback. As I mentioned last week, the DXY dollar index did break below its 200 DMA…which had been an incredibly solid support line for the dollar all year (bouncing off of it five times)…..The good news for dollar bulls is that after it broke below that moving average, it did not see any downside follow-through last week. The bad news, however, is that it didn’t bounce-back at all either. Therefore nothing was resolved last week, but how the dollar acts in the first few weeks of July should be QUITE important. If it bounces-back and regains is 200 DMA, it will lower the fears about the dollar…and cause assets like emerging markets and commodities to pullback. If, however, it falls further…especially if the DXY breaks below the key support levels we highlighted last week (of 95 and then 94), it’s going to be quite bearish for the dollar…(which will be rather bullish for those other asset classes). Therefore, the next significant move in the dollar is definitely be VERY important going forward…on several levels.
9) If the consensus is correct about the Fed…and they are going to cut short-term rates in July no matter what the data is…or what happens in the markets…that will indicate that they are indeed engaging in an “insurance” rate cut. It will also indicate (confirm) that the Fed “has the market’s back.” Whether Chairman Powell realizes it or not (and we’re guessing he does), this would also mean that he and the Fed both “have President Trump’s back” when it comes to the 2020 election as well. I'm not saying Mr. Powell likes this fact…but if he and the Fed do indeed feel the need to keep the stock market elevated (for whatever reason), it will keep President Trump’s odds of being re-elected quite elevated as well………What I'm saying here is not overly complicated, but it IS accurate……..It’s also something that some people HATE to admit to themselves. (In fact, many of them completely avoid admitting it to themselves.) However, when I push those people on this theory, they eventually recognize that it is an accurate one………Who are these people? They’re the ones who want the market to go higher…but who absolutely HATE President Trump. What I'm saying is that being a “bullish Democrat” in 2020 should make it a frustrating year…one way or the other.
9a) I am NOT trying to engage in political commentary here. I'm NOT trying to say whether President Trump should get re-elected or not. I'm merely stating that if the Fed keeps the stock market elevated (which I think will take a QE program), they will be helping the President’s re-election bid. They might want to keep the stock market elevated for other reasons, but an off-shoot of any actions that the Fed engages-in that keeps the stock market rallying...WILL be helpful to the President…….Again, whether they like it or not.
10) The housing stocks bounced late last week, but there is no question that the group has lost a lot of momentum recently. I turned bullish on the housing stocks just as it was turning up in the 4th quarter of last year (when everybody else was bearish)…and that call worked out VERY well. However, I'm starting to become concerned about its recent action. The fact that we’ve received some negative news on the group recently doesn’t help either. However, the data points we’ve seen over the past 6-8 months weren’t all that great during much of the past 6-8 months…and yet the ITB home construction ETF was still able to experience a 40% rally from late December until mid-June! However, the most recent disappointing news (which included weaker than expected “housing starts,” “existing home sales” and “new home sales”) IS being accompanied by some bearish action in the group……More specifically, the ITB home construction ETF broke below its trend-line from the December lows in late May. The early June bounce took it RIGHT BACK UP to that trend-line, but it was unable to break back above it. It has rolled-over once again…and therefore, I’ll be watching to see if it can hold its May 31st lows or not. In other words, if the recent failure to regain its trend-line is followed by a prominent “lower-low,” it’s going to raise a red warning flag on the group.
10a) If (repeat, IF) the housing stocks do indeed break-down, it would also raise a yellow flag on the broad market as well…as the ITB was an excellent leading indicator for the major averages last year. The ITB topped-out in July…and fell 10% BEFORE the broad market topped-out at the very beginning of October of last year…..At its worst level during this past month (June), the ITB had only declined by about 5.5%...and it bounced-back late last week. So it will have to fall further and take-out its May lows in a meaningful way…before we can get overly concerned about the recent weakness in this all-important economically sensitive group. However, this economically sensitive group is one that investors should be keeping a very, very close eye on as we move into the second half of the year next week and beyond.
11) The bank stocks had a good day on Friday…after the results of their stress tests became public…and many of them raised their dividends and increased their share buybacks. This enabled the KBE bank ETF and the KRE regional bank ETF to both climb very close to the top-end of a sideways range they had been in over the past month…as well a near the top line of a “symmetrical triangle” pattern (not drawn on the attached chart). Therefore, if (repeat, IF) they can see some upside follow-through as we move into next week (and through July), it should finally give the bank stocks some upside momentum. (Something they haven’t seen in two and a half years!)……In other words, investors will still have to wait and see if today’s pop in the bank stocks can hold after this weekend’s G20 meeting before they can get too excited about the group. This is especially true since pretty much every potential lift-off in the group has turned out to be a big disappointment since early 2017. Still, this is a group we’ll be watching very closely next week.
12) Summary of my current stance……I always like to present issues from both sides of the bull/bear ledger…and there is no question in my mind that a meaningful break above the all-time highs in the S&P 500 will be quite bullish for the stock market. It will create (more) momentum…and FOMO will kick-in as well…especially since we’re right at the beginning of a new quarter. However, I believe it is vitally essential to wait to see if the market can indeed break “meaningfully” above those highs…because I don’t think it is a lock that they will. Even before the break-down of the trade negotiations, both global & domestic growth were already slowing…and earnings estimates were coming down. Those estimates for earnings growth for the S&P 500 are now in the very low single digits…which raises questions as to whether they will justify a further rally after the 17% YTD rally we’ve already seen!……However, the markets are still very much dependent on liquidity. The problem is that most people seem to be equating “rate cuts” with “QE programs.” The problem with this thinking is history tells us that rate cuts do not have the same kind of direct and immediate impact that QE programs have. Therefore, assuming that a 25 basis point rate cut will have the same impact that the initiation of a QE program has had in the past ten years…is a mistake in our opinion. (BTW, the Fed has not cut rates since 2008.)…..Therefore, when you combine our stance is that a lot of the “trade truce” has already been priced into the stock market…with the slowing of both economic growth & earnings growth…with the fact that the Fed looks like it is going to engage in rate cuts, rather than the more aggressive QE programs…I am going to have to wait to see the stock market break above its old highs in a significant way before I can turn more bullish on its upside potential for the stock market at these levels.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
275 Grove St. Suite 2-400
Newton, MA 02466
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