- Stocks climb to multi-month highs on consumer sentiment, trade
- Investors appear to disregard border wall politics amid impeachment calls and declining retail sales
- Oil reaches highest point in three months, on OPEC, Russia cuts
U.S. stocks finished higher for yet another week, on improved consumer sentiment, pushing aside prior concerns about a global economic slowdown. However, we think investors should be cautious about buying into media reports extolling the consumer sentiment beat and what it may mean for markets.
The University of Michigan Consumer Sentiment Index jumped to 95.5 this month from 91.2 in January, beating expectations. The positive surprise highlights two things:
- Fed Chair Jerome Powell was correct about the longest government shutdown on record—which lasted for 35 days, beginning on Dec. 22 and ending on Jan. 25—not having any real impact on the economy, while warning that a second such event would hurt confidence, the very thing this index measures, and
- The market apparently didn’t trust Powell’s assessment, or estimates wouldn’t have been so solidly beaten
We wonder what else Powell has been saying that markets aren’t taking seriously. Perhaps that the Fed is willing to be ‘patient’ about interest rate hikes and ‘flexible’ about balance sheet reduction within the context of insufficient data due to the government shutdown, not necessarily as a policy shift?
For that matter, can we also rely on this consumer sentiment beat, or is it simply a positive surprise to something for which there were low expectations to begin with?
Consumer Sentiment Index 2018-Present
Based on the chart, sentiment has been steadily slipping since March 2018. Incidentally, that’s also when President Donald Trump started hitting China with tariff threats.
As well, stocks reached heights not seen in many weeks on reports that the world’s two largest economies have made substantial progress on the core trade issues, both according to Xinhua News Agency, the official Chinese state press bureau and President Trump himself, who said the countries are within reach of a breakthrough.
Nonetheless, U.S. political tensions have been recapturing investor focus. After being denied the $5.7 billion he wanted for his wall on the southern U.S. border, Trump declared a national emergency to secure additional funding via alternative methods, setting him up for a showdown with Congress. It appears that the positive outlook for consumer sentiment and a trade breakthrough helped investors overlook this potentially explosive political conflict Congressional Republicans and Democrats amid escalating calls for impeaching the president.
We can’t help wondering whether investors shrugging off this risk is bullish, signaling they’re willing to shoulder it, or whether it’s bearish, proving markets can be irrational. We skew toward irrational.
Stocks Gain Again But Yields Tell A Different Story
UST 10-Y Weekly
It is noteworthy that despite the longest equity rally in years, yields—including for the benchmark 10-year note—have been ranging since December. In fact, they are currently at the same levels they were during December, suggesting that investors aren’t willing to let go of the safety of Treasurys.
Of note, judging by the broken uptrend line since mid-2016 and the continuation pattern developing below that uptrend line, yields are heading lower, as investors amass additional Treasury holdings. Why would they do that if everything was hunky-dory with equities and the economy?
The dollar rose for a second week, but the currency was unable to corral investor exuberance. Technically, it formed a shooting star. Should the global reserve currency fall below the 95.00 level, it would suggest a top. At the same time, the 50 week MA crossed above the 100 week MA.
On Friday, the S&P 500 Index gained 1.09%, bringing it to a near-11-week high, with every sector in the green. Financials were clearly in the lead, +2.13%, as banks led the rally. Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) each jumped 3% each, just two weeks after Société General downgraded both to a sell rating (rare in a bull market).
Technically, the benchmark index crossed the dotted downtrend line in effect since Nov. 7, and is now contending with the horizontal 2,800 resistance level since mid-October. Of course, the ultimate test is the 2,940 level, the September peak-resistance. Both the MACD and RSI are overbought and seem to be set up for a decline, but that doesn’t mean that will happen. While the price escalated above the 200 DMA, the 100 DMA is falling further below the 200 DMA.
The SPX advanced 2.5% for the week, gaining for seven out of the past eight weeks, with all 11 sectors moving higher. Energy, +5.05%, was the obvious outperformer, tracking rising oil prices. Utilities lagged, on both daily, and weekly, +0.05, metrics.
The Dow Jones Industrial Average gained 1.74% on Friday. The 30-component, mega cap index advanced 3.28% for the week—it’s eighth consecutive gain—reaching a 15-week high.
The NASDAQ underperformed, edging higher on Friday by 0.61% while gaining 2.39% for the week. It was the tech-heavy index’s eighth straight week of gains as it exited a bear market, after rising 21% since the Dec. 24 low.
The Russell 2000 climbed 1.38% on Friday, its performance second only to that of the Dow. This is the second week in a row during which both mega and small caps outperformed.
Since December, we’ve been writing repeatedly about the apparent market inconsistency regarding trade war headwinds and the recent ongoing talk of a potential settlement. As the risks of a U.S.-Sino spat recede, small caps, whose domestically focused companies have little to gain from a breakthrough, should be underperforming, while multinationals which depend on global trade, should be buoyed.
Incongruously, however, both appear to be benefiting, a structural anomaly that’s difficult to explain. The small-cap index jumped 4.48% for the week, it’s eighth straight gain. It outperformed for the week as well, for a 15-week high.
Reduced Guidance, Other Signs Of Economic Slowing
Multinational toy maker, Mattel Inc (NASDAQ:MAT), plummeted 19% on Friday, its worst day since October 1999, after it issued reduced forward guidance for 2019 and announced “demand for its iconic Barbie doll was slowing.” Clearly, last year’s investor sensitivity to reduced guidance amid ongoing concerns for a slowdown has resumed.
MAT Weekly 1999-2019
Technically, the price fell below the 200 DMA after finding resistance by a downtrend line since November 2017, suggesting there’s been trouble brewing for some time, unless of course, this price depression proves to be a bottom.
This reduced outlook along with the severe investor reaction could be considered as one of a slew of indicators pointing to an economic slowdown. Last week, the Commerce Department said U.S. retail sales fell 1.2% year-over-year in December, the most important month for most retailers. It was the sharpest drop for this measure in nine years.
The National Retail Federation confirmed that holiday sales came in below its own forecasts, thanks to rising consumer “worries.”
There are other signs that family budgets are tightening. Auto sales went into a slump in late 2018 and may become even worse this year. Apple (NASDAQ:AAPL), like so many other consumer driven shares, is getting a taste of what happens when buyers decide to hang on to their aging iPhones for just one more year.
On the flip side, January marked the 10th consecutive month in which there were more job openings than unemployed workers, yet additional evidence that the labor market remains tight.
How then to explain such apparently contradictory data regarding the health of the economy? These are all telltale signs of a maturing economic cycle.
Early Friday, Bloomberg reported that crude oil had been boosted by a pledge from Russia to expedite production cuts, as part of a broader effort by the OPEC+ to stabilize the oil market. The report also noted that because of an accident, production had been suspended in Saudi Arabia’s offshore Safaniya oil field.
Technically, oil closed at its highest level since Nov. 19. The commodity is set to continue higher, though first it must contend with the 100 DMA at 56.70.
All times listed are EST
U.S.: Presidents’ Day Holiday; markets closed
Canada: Family Day Holiday; markets closed
19:30: Australia – RBA Minutes: policy remained unchanged at the last meeting.
4:30: U.K. – Employment Data: December unemployment rate to hold at 4%, while average earnings (including bonus) expected to rise 3.5% from 3.4%.
5:00: Germany – ZEW Economic Sentiment (February): sentiment to edge higher to -14.1 from -15.
10:00: Eurozone – Consumer Confidence (February, flash): expected to fall to -8.0 from -7.9.
19:30: Australia – Employment Data (January): unemployment rate to remain flat at 5.0
2:00: Germany – CPI (January, final): expected to remain flat at 1.4%.
3:15 – 4:00 – French, German, Eurozone Manufacturing and Services (February, flash): fears of a eurozone recession are rising, and further weakness in these PMIs would suggest that the eurozone is heading towards a period of negative growth.
8:30: U.S. – Durable Goods Orders (December): forecast to remain flat at 0.8% MoM. Markets to watch: U.S indices, USD crosses
9:45: U.S. – Services and Manufacturing PMI (February, flash): services to edge up to 54.4 Markets to watch: U.S. indices, USD crosses
11:00: U.S. – EIA Crude Inventories (w/e 15 Feb): stockpiles rose by 3.6 million barrels in the preceding week.
4:00: Germany – IFO index (February): business climate index to fall to 99.0 from 99.1.
5:00: Eurozone – CPI (January, final): CPI to stay flat at 1.4% YoY Markets to watch: EUR crosses.