The WMA Weekly Market Wrap – Feb. 12, 2019

February 12, 2019
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Bumping Up Against the 200-DMA

The S&P 500’s 200-day moving average is important to trend-following tactical investors looking for signals about whether they should be in or out of the market. How might this work? Here’s one simple and popular iteration.

If the S&P 500 is above its 200-DMA, own it. If it closes below, shift to bonds (say, the Barclay’s Aggregate). This approach has provided slightly better returns than the S&P with lower drawdowns since 1997, when daily data became available. However, that result assumes perfect execution, free trading, and no taxes, none of which are available. Moreover, it assumes we’ll be able to stick to the model through thick and thin, through 160 signals during that time. Were you using that approach currently, for example, you’d still be out of the market despite its big gains since Christmas.

Anyway, last week provided a good example of how the 200-DMA can impact the markets. The S&P 500 has been recovering nicely since Christmas, but on Tuesday it ran up against the 200-DMA, leading to losing days on Wednesday and Thursday and only a slight uptick on Friday. Prior to those two losing days, the stock market had had only six losing days this year. The down-up market of the last few months has drawn out a nice little “V” sign on everyone’s stock chart. We’ll see if this difficulty is a blip or has the makings of a “W.”

Now the news.

Domestic stocks moved very modestly higher last week, helping most of the major indexes record their seventh consecutive weekly gain. Within the S&P 500, utilities shares fared best, followed by the larger industrials and information technology sectors. Energy stocks fared worst as oil prices drifted lower.

The Sino-U.S. trade dispute moved back into the headlines last week and seemed to play a large role in driving sentiment. Stocks reversed an early rally Thursday and headed lower following remarks from National Economic Council Director Larry Kudlow, who told Fox News that negotiators had “miles to go before we sleep,” echoing not only Robert Frost but also Commerce Secretary Wilbur Ross, whose remarks about being “miles and miles” from an agreement sent markets lower in late January.

Later Thursday, CNBC reported that President Trump and Chinese President Xi were unlikely to meet before March 1, the 90-day tariff truce deadline the U.S. has established prior to raising the tariff rate on Chinese goods to 25 percent. CNBC also reported that the U.S. was likely to keep the current 10 percent tariff rate steady in the absence of a meeting, but confidence in a delay seemed to diminish Friday, sending stocks lower again. Weak economic data from overseas, particularly from Europe, also seemed to weigh on sentiment.

The pan-European STOXX Europe 600 was slightly lower on the week amid fresh trade worries and weak data that underscored the extent of the growth slowdown in the eurozone and its largest economy, Germany. In Asia, Japanese were down a bit more for similar reasons while Chinese markets were closed last week, as the country brought in the Year of the Pig, symbolic of wealth.

After the Fed’s dramatic reversal nearly two weeks ago, analysts have been left to ponder why Chairman Powell and his colleagues changed course. The best bet is because of China, where the economic data are troubling. Three years ago, then Fed Chair Janet Yellen executed a similar course correction in response to weakening Chinese data. Instead of four rate hikes in 2016, as previously signaled, the Fed proffered only one. China’s manufacturing numbers today are back to where they were when Yellen’s Fed made its turn. A new turn is not predetermined, obviously, but Powell’s remarks give him that flexibility, should he decide to exercise it.

Last week’s jobs report was terrific, as I reported here a week ago, but the bond market’s reaction to it has been surprisingly subdued. On Friday, the benchmark 10-year U.S. Treasury note closed at 2.63 percent. That level hardly suggests an overheating economy. Indeed, Yellen recently said that it’s possible that the Fed’s next move could be a rate cut. I wouldn’t say that’s likely, but it’s hardly unreasonable. The evidence keeps getting clearer that, as I argued here a week ago, the Fed won’t likely do much on interest rates in 2019, which is good news for stocks.

Other news and notes follow.

The latest SPIVA results are in from S&P and they are consistent with what we have seen before. Institutional money managers routinely underperform their benchmarks, largely on account of fees. Morningstar came to a similar conclusion: 2018 was yet another year to forget for active managers.

I am not the only one identifying China as a key threat to the stock-market rebound, a month after warnings of a slowdown in the world’s second-largest economy rattled markets across the globe. However, international investors poured more money into Chinese stocks last month than in any month on record. As noted above, stock markets in China were closed last week, which also means at least seven days without any disappointing data. The U.S. is dispatching its chief trade negotiator, Robert Lighthizer, and Treasury Secretary Steven Mnuchin to Beijing to continue trade talks as a March 1 deadline nears. While the two sides have made progress, they are still a long way from a deal. And President Trump probably won’t meet Xi Jinping before the deadline.

Small business owners’ confidence in the economy fell for the fourth straight month in December, while their outlook on business conditions sank to the lowest since late 2016. Consumers’ future expectations for the economy posted the largest three-month decline since late 2011. The Fed’s latest survey of senior loan officers found that banks expected tighter standards, weaker demand, and worse performance for business and household loans this year. Such measures of sentiment continue to show negative economic expectations while actual economic trackers, such as the most recent jobs report, continue to be strong. That sort of divergence often augurs a coming downturn, sometimes within six months or so.

Twenty-six of the 30 stocks in the Dow Jones Industrial Average and 465 of those in the S&P 500 have climbed this year. All 11 S&P 500 sectors are in the green for 2019. After months of downward revisions, analysts now expect the S&P 500 to post a year-over-year earnings decline in the first quarter of 2019, according to FactSet. As recently as September 30, analysts predicted the earnings growth rate for the current quarter would hit 6.7 percent, in part due to the impact of the 2017 tax cuts burning off. Earnings growth in the fourth quarter of 2018 is on track to hit 12 percent, with nearly half of S&P 500 companies having released quarterly results so far. If their estimates prove to be true, it would be the first year-over-year contraction of S&P earnings since the second quarter of 2016.

How are President Trump’s tariffs working? A typical American family will spend $60 extra per year due to tariffs. Duties on steel and aluminum cost Ford $750 million last year, according to the company. As a result, profit-sharing checks to Ford’s hourly workers were slashed anywhere from $750 to $1,850 each.

Americans 60 years old or more owed $86 billion in student loan debt, their children’s and their own, at last count. Student debt is a major contributor to the overall increasing debt burden held by seniors.

After a banner year, many small businesses are becoming more cautious about their investment and hiring plans. Just 14 percent expect the economy to improve this year, while 36 percent expect it to get worse.

U.S. stocks and bonds have been rallying together of late, an atypical pattern that some worry suggests the January rebound in equities is fated to run up against a painful reversal.

Bill Gross, the one-time “Bond King,” retired after a disappointing final act. His farewell interview is here. Despite Gross’s misfire, active managers need to make risky wagers, even if they could go bust, if they are to outperform.

Senators Bernie Sanders and Chuck Schumer argue that it’s necessary to put limits on how much stock companies can buy back and on the dividends they pay, and at least five declared or likely Democratic presidential candidates want to restrict how much stock U.S. companies can buy back from shareholders. It may be good politics, but it is an argument lacking supporting evidence. Instead of restricting share repurchases or dividends, we should make it easier for Americans to invest in America via the stock market.

Amazon founder Jeff Bezos, President Trump’s foremost nemesis in the business world, has profited more than anybody else during the Trump presidency. Since the 2016 election, Bezos has become the world’s richest person, his net worth swelling by $66.8 billion, to $135.4 billion, making his fortune a third bigger than Bill Gates’s, and almost 50 times greater than the president’s, according to the Bloomberg Billionaires Index. Bezos also made big news last week by taking on The National Enquirer (leading to obvious jokes, such as “Alexa, destroy my enemies,” and an obvious New York Post cover). Under the headline “No thank you, Mr. Pecker” (referring to David Pecker, CEO of American Media, publisher of the Enquirer, and close friend and supporter of the president), Bezos posted the full text of emails from the publisher — including the cell numbers of two executives — that he said constitute “extortion and blackmail.” This will be a fight to watch.

General Motors began more layoffs last Monday, axing 4,000 workers. The new round of cuts means GM has eliminated more than 14,000 jobs in the U.S. and Canada since November. Car dealers are beginning 2019 with a heavier inventory of unsold vehicles on their lots.

Concerns about the government shutdown and a drop in new orders crimped the U.S. services sector’s pace of expansion in January. The Institute for Supply Management’s non-manufacturing purchasing managers index fell to 56.7 in January from 58.0 in December.

President Trump gave his State of the Union speech last week. Mr. Trump said only three things stand in the way of an “economic miracle” taking place: foolish wars, politics, and ridiculous partisan investigations. Notably absent from the list of impediments was the Federal Reserve.

A steady decline in foreign demand for U.S. government bonds hasn’t seemed to have the impact on rates some predicted. Foreign ownership of U.S. government debt has been decreasing since it reached a peak of about 55 percent during the financial crisis in 2008. Foreign ownership fell below 40 percent in November.

A wave of bankruptcies is sweeping the Farm Belt as trade disputes add pain to already low commodity prices.

SunTrust Banks and BB&T said they agreed to combine in a merger of equals valued at about $66 billion, an all-stock deal that will create the sixth-largest U.S. bank in terms of assets and deposits.

New research casts further doubt on corporate welfare. When companies promise thousands of high-paying jobs in exchange for major tax breaks and incentives, those jobs often don’t show up.

Maryland has become the latest state to propose a fiduciary standard for brokers and insurance producers. The SEC’s delayed best interest standard will likely come this fall.


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