Dare to hope

Dare to hope.  Stocks traded up in yesterday’s session on hopes that the Chinese trade dispute is on a positive track.  Fueled with news that Xi Jinping would rework its China 2025 plan to be more friendly to US concerns along with promises that soybean purchases from US farmers would resume, markets rocketed up in the first half of yesterday’s session.  Adding to the positive sentiment was the Bureau of Labor Statistics report that showed consumer inflation is under control.  The excitement faded by mid day and much of the early gains were given up leaving all indices in the green but off their highs.  The theme of late session fading is becoming a more common one these days indicating that investors are light on the confidence needed to propel markets upward.  There are many factors that would cause the lack of confidence.  Clearly the main drivers are trade fears, economic slowdown, earnings pullback, and rising interest rates. Additionally, we need to factor in the time of year.  Typically, stocks tend to reflect a more positive outlook in the closing months of the year, but this year was different.  Institutional investors such as endowments and hedge funds have had a rough year with many of them racking up losses. These large investors are the ones who have the might to prop up markets but many of them do not want to make a bad situation worse so they are waiting on the sidelines for 2019 when they get a reset.  Retail investors can also be big drivers but typically follow moves by institutions, normally jumping in once the market has already moved up (and often too late).  Finally, many dip buying rallies start with more speculative large cap growth stocks and the household names in that group can’t seem to hold altitude.  The FANG stocks, which are part of the large cap growth group, have been favorites of speculative short term traders and retail investors and that group has been under pressure this year.  All of these things combined have left the markets soft in these final weeks of the year.  The good news is that a lot of the overhang associated with the close of the year will be removed once the calendar switches over and investors begin the search for value.  And there is a lot of that out there as multiples have shrunken throughout the year.  Additionally, the markets are reacting positively to even the hint of the slightest progress on trade with China making positive overtures, 2019 may bring some more tangible progress on that front.  Finally, the Fed has signaled that they would temper their rate hikes based on the economics, which implies that they will stop raising rates if things begin to slow down.  Economic performance will become even more critical in the new year as will corporate earnings, both of which are expected to experience slowdowns in coming quarters.

Today, we get the Import Price Index which tracks prices paid for goods produced abroad and purchased domestically.  That index is expected to show a +1.3% growth year over year versus last month’s +3.5% increase.  We will also get the weekly employment numbers today, and while they typically don’t move the market, they have been under some scrutiny lately.  The weekly release reports initial jobless claims indicating how many workers are freshly out of work.  In growing economies with job growth, these weekly numbers typically will trend down as they have since their peak at around 660,000 new weekly claims in 2009.  What has economists looking closely is that the number of claims appears to have bottomed out in mid-September with a low of 202,000 and the weekly numbers have been trending up.  This week’s number is expected to come in at 226,000.  While it can be a just a blip, everyone is searching for a canary in the coal mine these days so we need to watch those numbers closely.  Today’s session will start with positive news as industry sources have confirmed that China has purchased 1.4 – 2.0 million tons of US soybeans, making good on their promise.  President Trump has made overtures about intervening in the detention of Huawei’s CFO, though he has yet acted.  Theresa May survived her no confidence vote and is back to pursuing Britain’s Brexit deal with EU officials and the Italian government offering up some more conservative spending numbers.  Hopes for positive movement will continue to drive the market but we have to remember that hope is not a strategy. Please call me if you have any questions.

daily chartbook 2018-12-13