Market Minutes for the week of November 19th:
“He’s just a bull carrying his own China shop with him whenever he travels the world.” Douglas Brinkley – presidential historian on President Trump.
Here is what I am thinking and hearing: *1.)
*2.) Fear is more powerful than greed. The worst start to a Thanksgiving week in 45 years. The markets are reacting to the following: An increasing number of forecasts for slowing domestic and global growth in 2019 and 2020 (but no recession). A larger number of companies have reduced earning guidance for 2019, in spite of a healthy earnings season. A continuing fear that the Fed will overshoot on its intended schedule of rate increases for 2019. An ongoing worry that tariffs will increase to 25% (from the current 15%) in 2019 if there is no progress on U.S.-China negotiations before the end of the year. A potential slowing of demand for Apple iPhones which filters into a potential weakening of demand for semiconductors and related components that go into the Apple products. A massive sell off of all technology shares that created a major “blue light special” in the sector fueled by the perceived worry over Apple. A rapid decline in oil prices has fanned the worries over a decline in global growth. *3.) The markets are overshooting to the downside because of the proliferation of ETFs and algorithmic trading strategies which are agnostic to economic and corporate fundamentals. Bear in mind, none, not one of the Wall Street research departments are forecasting a recession for 2019 or 2020 but the market action seems to be pricing one in. *4.) From market technician Tony Dwyer: “Putting [the] correction into context. We often repeat that market corrections only seem ‘natural, normal, and healthy,’ until you are in one. Since the late September peak in the major market indices, the S&P 500 (SPX), Nasdaq Composite (NAZ) and the Russell 2000 (RTY) were down roughly 10%, 14% and 16%, respectively at the late October low. There has even been a more dramatic 26% pullback in the MSCI Emerging Market Index (MXEF) from its peak in late January. Although these pullbacks are very nasty, it is important to remember the SPX, NAZ, RTY, and MXEF were up 62%, 93%, 84%, and 85%, respectively over the past two and a half years. In other words, put into the context of those kind of gains, the pullbacks on paper look normal – but they certainly do not feel that way.” *5.) A number of prominent market participants are warning that the Fed’s agenda is beginning to hurt asset prices. Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School of Business: “The market is clearly worried about over-tightening of the Fed…The market is saying that the pace is a little too fast.” Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates: “We’re in a situation right now that the Fed will have to look at asset prices before they look at economic activity. It’s a difficult position.” David Bianco, CIO for the Americas at DWS: “[The] Fed should slow [its] pace of hikes, given [the] contained inflation & slower growth ahead.” Federal Reserve Bank of Philadelphia President Patrick Harker: “At this point, I’m not convinced a December rate move is the right move…We’re not seeing the recent data telling us that inflation’s moving rapidly past our target. So I think we have some time to let this evolve.” Jim Cramer: “What makes me so certain that Powell can stand down after this hike [in December] and not compromise the independence of the Fed? First, stocks have collapsed. The FAANG stocks have lost more than a trillion in value…Second, oil. It has collapsed, off $22 from its October highs…Third, the collapse of the retailing stocks…Fourth, housing is awful…Single family starts in October decreased year-over-year the largest drop since March 2015…Fifth, for the first time in 102 months our hotels’ collective revenue per room fell last month…Sixth, the trade conflicts are slowing the economy down…Seventh,…American Electric Power, the nation’s largest power transmission company told us last month: ‘The mix of growth has started to shift. Through the first half of the year growth was balanced across most industries and operating companies. In the third quarter growth was dominated by the oil and gas sectors, while the remaining sectors moderated.’… Eighth, autos…The demand continues to slow for new cars.” *6.) The U.S. economy has clearly downshifted, but it is certainly far stronger than the markets are giving it credit for. 2 + 2 doesn’t equal 4 right now so a reallocation out of stocks into bonds at these levels seems ill advised.
Happy Thanksgiving to all of our Cascade clients and friends. I believe that there is always something to be thankful for!
JP Morgan says that the U.S. economy could slow to a 1.9% rate of growth in 2019 with growth holding above 2.0% in the first and second quarters before declining to 1.7% in the 3rd quarter and 1.5% in the 4th quarter of 2019. The bank said that monetary policy which has been supporting growth for nearly ten years, will move closer to a neutral position and fiscal policy will be less supportive this year, but more supportive in 2019. If tariffs jump to 25% in January, that will add a more noticeable drag on growth.
Goldman Sachs seems to be singing from the same song sheet as JP Morgan. For 2019 Goldman predicts 2.5% growth in the first quarter 2.2% in the second quarter, but just 1.8% and 1.6% in the final two quarters respectively. Tighter financial conditions and fading fiscal stimulus will be the major drivers of deceleration according to the bank’s chief economist Jan Hatzius. Right now, Goldman says inflation as measured by the PCE (Personal Consumption Expenditures) index should hold at 2.2% in 2019. The Fed Funds rate should top out in the 3.25% to 3.50% range while 10-year Treasury yields should peak at 3.50%.
Economist Dr. Ed Yardeni of Yardeni Research has estimates of S&P 500 earnings growth of +4.9% ($170 per share) in 2019 and +6.8% ($179 per share) for 2020.
The Conference Board said that its Leading Economic Index (LEI) rose by 0.1% for October after posting gains of 0.6% and 0.5% in the prior two months. “The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys”, explains MarketWatch. Five of the ten indicators showed expansion in October.
The National Association of Homebuilders (NAHB) announced that builder sentiment fell by 8 points in November to a reading of 60 and well below the estimate of 67. The NAHB said that “Builders…continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices.”
The Commerce Department reported that U.S. housing starts for October rose by 1.5% amid a rebound in multi-family projects. Construction of single-family units however, declined for the second straight month.
The National Association of Realtors said that sales of existing homes rose by 1.4% in October, breaking a six-month losing streak. October sales were down 5.1% from a year earlier, the largest annual drop since July of 2014. The median sales price was $255,400, up 3.8% from a year ago.
The University of Michigan Consumer Sentiment Index for November fell by 2.8 points to 97.5. The index survey “…considers 500 consumers’ outlook on economic prospects, accounting for sentiment on personal finances, inflation, unemployment, government policies and interest rates”, according to CNBC.
The Commerce Department said durable goods (big-ticket manufactured goods) fell by 4.4% in October, the largest amount in 15 months. The key economic data point that tracks business investment is showing weakness for the third straight month.
According to Peter Boockvar, “…foreigners were net sellers again in September of US Treasury notes and bonds…The selling totaled $11.5 billion which brings the net year to date buying to $90.5 billion, which if it holds would be the most since 2014 but as a percentage of supply is much smaller. China really picked up the pace of selling as it shed $18.5 billion of notes and bonds…which marks the 5th month in the past 6 they’ve reduced their US bond position…Japan’s holdings stand at the least since 2011…Bottom line, foreign holdings of US Treasury total marketable debt stands at 40.5% as of September. It began the year at 43%. Five years ago it stood at 49% and 10 years ago it was at 54%.
The latest rig count from Baker Hughes for the last week shows a total rig decline of 3 to 1,079 active U.S. drilling rigs. Oil rigs fell by 3 to 885 and gas rigs held steady at 194.
“According to the National Association of State Retirement Administrators (NASRA), nearly 75% of the 128 public [retirement] plans it has tracked have reduced their investment return assumptions since fiscal year 2010, which has resulted in an all-time low median investment return assumption of 7.45% as of November, from 8% eight years earlier…”, as reported in Chief Investment Officer.
According to a Priceline survey of 1,000 adults polled in October, one-in-four working Americans will finish the year with nine or more days of paid time off remaining. By forfeiting a combined 200 million vacation days that cannot be rolled over, American workers lost about $62.2 billion in benefits. That means employees basically donated $561 in work time to their employer last year.
Eat up on Thanksgiving. According to the Harvard Law School’s Food Law and Policy Clinic and the Natural Resources Defense Council (NRDC), as much as 40% of groceries purchased in the U.S. go uneaten as Americans throw away $165 billion in wasted food every year. “The ‘sell by’ dates are actually for stores to know how much shelf life products have. They are not meant to indicate that the food is bad. ‘Best before’ and ‘use by’ dates are for the consumers, but they are manufacturers estimates as to when the food reaches its peak”, explains MarketWatch.
Green Wednesday? Cannabis retailers are pushing the Wednesday before Thanksgiving as the Black Friday for pot smokers. Last year, sales of marijuana and marijuana gifts spiked on the Wednesday before Turkey Day. Headset, a cannabis analytics company, found sales on Green Wednesday last year were double of that on a typical Wednesday, making it the biggest cannabis holiday after 4/20.
According to the Associated Press, the nation’s 3rd largest student loan servicer Navient has appeared to boost its profits by directing some borrowers into the higher-cost plans when lower-cost options were available.
According to Adobe Analytics, U.S. consumers spent $31.9 billion shopping online in the first 20 days of November, up 17.7% over last year. Monday reached the first “$2 billion day of the season” and Wednesday was on track to hit $2.1 billion.
Target CEO Brian Cornell said that he sees absolutely “no sign” the consumer spending environment is cooling off as Target heads into the holiday season, in fact shoppers are making more “fill-in” trips to Target stores.
Gap has said that it is looking to close “hundreds” of stores at mall locations “quickly and aggressively” as sales at the Gap brand continue to slide.
According to The Information, Apple has quietly acquired AI startup Silk Labs. Terms of the deal have not been revealed. Silk Labs makes AI software light enough to fit into small devices such as cameras and smart home devices.
Cisco Systems has acquired UK-based Ensoft Ltd. Terms were not disclosed. Ensoft is a software solution maker for service provider networks.
Airbnb says that it recognized “substantially more” than $1 billion in revenue in the third quarter, which would make it their strongest quarter since the company was established in 2008. Airbnb plans on taking the company public in 2019.
GE has said that it will sell a $1.5 billion portfolio of healthcare equipment leases and loans to TIAA Bank. GE says the portfolio consists of loans and leases to 1,100 hospitals as well as 3,600 physician practices and diagnostic and imaging companies in the U.S.
Lockheed Martin has announced that its experimental supersonic airplane has officially entered production. NASA will flight-test the QueSST aircraft by the end of 2021. The new aircraft will cruise at 55,000 feet at a speed of 940 miles per hour and is expected to create a noise level similar to that of a car door closing.
David’s Bridal has filed for Chapter 11 bankruptcy. The wedding-gown emporium said that all of its 300-plus stores will stay open for business and orders and alterations will continue as promised.
Intel says it is adding $15 billion to its existing stock repurchase program.
According to the NYC and Virginia governments, half of the jobs at Amazon’s two new HQ’s will be in tech while the rest will be in “administrative, HR and custodial staff.”
Target reports 3rd quarter earnings of $1.09 per share on revenue of $17.59 billion, an increase of 5.5% year over year.
Sonos reports fiscal 4th quarter earnings of -$0.02 per share on revenue of $272.9 million, an increase of 27.5% year over year.
Nordstrom reports 3rd quarter earnings of $0.67 per share on revenue of $3.65 billion, an increase of 3.1% year over year.
Next week: Earnings from: Cracker Barrel, GW Pharma, Box and Dollar Tree. Economic reports: Case-Shiller/S&P Home Price Index – Composite 20 City for October, Revised 3rd Quarter GDP, Personal Incomes and Personal Spending for October, Pending Home Sales for November, Chicago PMI for November and Consumer Confidence for November.
WTI Crude oil: $50.70 per barrel. 10-year U.S. Treasury bond: 3.04%. Gold: $1,227 per ounce.
Sources: U.S. Trust, First Trust Economics, CNBC, Real Money Pro, Morningstar, Seeking Alpha, Market Watch, The Wall Street Journal, Reuters, Bloomberg, 361 Capital, Yardeni Research., and Chief Investment Officer.
Disclosure: This publication shall not constitute an offer to sell or the solicitation of any offer to buy or sell any securities of the companies mentioned. This publication is solely a compilation of recent news releases from the sources cited above.
At the time of publication: Cascade Investment Group and or its clients owned shares of INTC, APPL, LMT, CSCO and AMZN.
Ken Beach, President and Managing Partner of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.