The WMA Weekly Market Wrap 2/19/2019 Edition

February 20, 2019

200-DMA Breakthrough

The major domestic equity indexes posted their eighth consecutive weekly climb last week, as optimism that the U.S. and China would forge a trade deal before the U.S. raises tariffs offset weak December retail sales data. The latest round of U.S.-China trade talks wrapped up in Beijing last week. Treasury Secretary Steven Mnuchin tweeted that the meetings were “productive.” Negotiations will continue next week in Washington, China’s Xi Jinping said.

President Trump said he is open to extending the March 1 deadline to raise tariffs on Chinese imports if both sides are close to agreement by then. Interestingly, on trade, the president has much more in common with progressives like Rep. Alexandria Ocasio-Cortez, who argues for stronger trade rules to protect American jobs, than with traditional Republican views.

Last week closed the best eight-week stretch for the Dow since September 2009, according to Dow Jones Market Data. Stocks in the energy and industrials sectors within the S&P 500 generated the strongest returns, while utilities and financials were the laggards, and small caps outperformed large caps. The S&P 500 closed above its 200-day moving average for the first time since early December Monday, and held there for the week, ending a 46-day streak without eclipsing the closely watched technical level.

Crude oil prices increased nearly 5 percent last week, supporting energy-related stocks. West Texas Intermediate crude, the U.S. benchmark, climbed above the $55 per barrel mark on Friday. OPEC and Russia have voluntarily cut their oil production, reducing supply and supporting prices. U.S. sanctions on Venezuelan crude exports, designed to pressure the government of Nicolas Maduro, are further pressuring global supply.

Weak economic data released on Thursday briefly derailed the gains in U.S. stocks. The Commerce Department reported that retail sales declined 1.2 percent in December, much weaker than expected, marking the largest monthly drop since September 2009. Note that the December retail sales release was delayed because of the partial government shutdown in January. The Labor Department’s weekly jobless claims figures also unexpectedly increased, further dampening sentiment about the U.S. economy.

The yield on benchmark 10-year U.S. Treasury notes increased modestly over the week, to 2.66 percent, despite a sharp decrease on Thursday following the release of the unexpected drop in December retail sales. Inflation data continued to show limited upward pressure on prices, with the January consumer price index increasing 1.6 percent YOY. The January producer price index declined 0.1 percent from December.

Overseas, the pan-European STOXX Europe 600 rose about 3 percent, also on trade optimism. France’s CAC 40, Germany’s DAX, and the UK’s FTSE advanced too. Gains came despite more signs of slowing in the eurozone economy and the ongoing impasse over Brexit. Europe looks likes the weak link in the global economy.

In Asia, Japanese stock indexes all rose more than 2 percent. Chinese stocks also rose as mainland investors returned from a week-long Lunar New Year holiday in a buying mood, despite some skepticism there about the likelihood of a trade deal. For the week, the Shanghai Composite added 2.5 percent and the CSI 300 rose 2.8 percent, marking the biggest weekly gain in three months for each index, according to Reuters.

Other news and notes follow.

Stock prices and the economy have diverged, and that makes it even harder than usual to judge whether there is a true global slowdown under way. There are three primary possibilities.

Fourth-quarter results from U.S. companies highlight the many and varied ways that China’s cooling economy affects American business and, in turn, offer a glimpse of what’s happening inside China. The indications are that slowing growth there is broad, if still modest. After predicting eye-popping 11 percent first quarter profit growth for S&P 500 companies last year, analysts have massively scaled back expectations to the tune of roughly $16 billion in profits. They are now predicting the first year-over-year decline in 3 years. So far, 53 S&P 500 companies have issued negative guidance for Q1, while only 12 have revised guidance upward, according to FactSet.

The number of job openings in the U.S. rose in December to the highest level on record. U.S. household debt rose by $32 billion to $13.54 trillion in the fourth quarter, the 18th consecutive increase. A record 7 million Americans are 90 days or more behind on their auto loan payments, even more than during the wake of the financial crisis. 2018 marked the highest level in the 19-year history of the loan origination data, with $584 billion in new auto loans and leases.

Vanguard defends active bond funds.

The proportion of fund managers surveyed by Bank of America Merrill Lynch that are overweight global equities is at its lowest level since September 2016, according to the monthly BAML fund manager survey. Being long emerging markets is the market’s most crowded trade for the first time in the survey’s history.

President Trump’s NAFTA replacement deal may be in trouble.

Former Federal Reserve Chairman Paul Volcker slammed the Trump administration’s handling of U.S.-China relations in a rare interview with Ray Dalio.

America’s economic data divergence isn’t going away.

Fear goes missing in the biggest U.S. junk rally in a decade.

Traders hedge stock doomsday with record fixed income inflows.

The yield curve has been stuck just above flat for a long time now.

“Nationalism’s largely unpredicted resurgence is sobering,” Foreign Affairs argues.

It is unlikely that a 70 percent marginal tax rate, proposed by many progressives, would generate more revenue or help lower-income Americans without major effects on the economy.

The Green New Deal calls for a universal basic income paid to everyone. A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. How expensive? Perhaps $3 trillion per year, or about 75 percent of all current federal expenditures.

Roughly 40 percent of Americans don’t have the financial flexibility to handle a $400 emergency expense, according to the Federal Reserve. Indeed, the Fed estimates that among those who do have investments, half have less than $40,000 invested.

Recession risk is real, according to Nobel laureate Robert Shiller, and one might come as soon as this year.

Income inequality is likely worse than before the Great Depression.

Estimates from nonpartisan government scorekeepers and other independent analysts did not project that President Trump’s tax cut would pay for itself. However, Treasury Secretary Steven Mnuchin said it would. What happened? So far, the independents have been right. Federal tax revenue declined in 2018, the first full calendar year under the new tax law, despite robust economic growth and the lowest unemployment rate in nearly five decades. Meanwhile, federal spending increased 4.4 percent, pushing the U.S. budget gap up by 28 percent, its highest level for a full calendar year since 2012.

Mistaken identity sends shares soaring 30 percent.

The Apple attorney in charge of communicating the company’s insider trading policy charged with insider trading.

Amazon felt the techlash in New York and will no longer build a headquarters and move 25,000 jobs there.

Economists and markets still aren’t on the same page about what the Fed should do next.

As noted above, December retail-sales numbers were super-ugly, but they don’t gibe with what we know about the broader economy. Those figures were so awful in fact that some think it is a one-time glitch. But year-end data are down generally.

Amazon abandoned its $2.5 billion plan to build a New York City headquarters, undoing one of the country’s biggest economic-development deals.

On Friday, President Trump signed a spending bill to keep the government open and then declared a national emergency to try to get more border-wall funding without Congressional approval or oversight. Expect Congressional attempts to thwart it and litigation to try to stop it.

Federal Reserve officials are zeroing in on a strategy to end the wind-down of their $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than they had once anticipated.

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