Written by Lance Roberts, Clarity Financial
Get out your party hats ladies and gentlemen, the market closed at all-time highs on Friday finally eclipsing the January peak. After 145 days of slogging, the “bull market is back, baby!”
Well, at least for now.
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Last week, we discussed how the market has become distracted from the bigger picture by any piece of news that supports the bullish narrative.
But, as Jerry Seinfeld once quipped: “Not that there’s anything wrong with that.“
The bullish momentum has kept stocks buoyed over the last several months and during that time we have been increasing equity exposure since March opportunistically using pullbacks to do so.
Despite concerns of a political debacle in the White House, the markets rose last week on hopes the “trade dispute” with China would be quickly resolved. That hope vanished on Friday as Bloomberg reported:
“The trade war between the U.S. and China is primed to escalate after their governments failed to make progress in two days of talks.
The two sides had met with low expectations for this week’s meetings and no further talks had been scheduled, a person familiar with the discussions said. The person, who requested anonymity to discuss the private deliberations, also said Chinese officials had raised the possibility that no further negotiations could happen until after November’s mid-term elections in the U.S.”
Oh, and remember the whole “North Korean” deal? Yeah, that is over too. (As I stated two months ago, it was “all show and no go” for North Korea. There was never any intention of actual denuclearization.)
Furthermore, Germany has begun to look to move away from the U.S. dollar. Russia remains a geopolitical risk. The Iranian saga continues and, most importantly, the “global economic acceleration is over.” (chart courtesy of Zerohedge)
Squirrel!!!!!
Regardless of all those reasons to be concerned, attention was quickly shifted to focus on Jerome Powell’s Jackson Hole “sentence.”
“The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one. My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.
There is good reason to expect that this strong performance will continue. I believe that this gradual process of normalization remains appropriate.“
Well, what did you expect him to say?
“The economy is doing okay, but real wage growth and full-time employment for most American’s remains elusive. Real inflation, when you look at what the average household deals with is north of 5% and our policy actions have really done nothing more than enrich all of our friends here in Washington and on Wall Street.”
I know…it’s a bit “tongue-in-cheek,” however, any statement that was not strongly supportive would have sent asset prices plunging. Of course, with the President already “not so happy” with Jerome Powell anyway, it keeps concerns of interference from the White House minimized.
However, while “revised” statement was entirely sarcastic, is not so far from the truth as shown in the charts below. It is hard to support the claim that “anybody who wants a job can find one.” It is full-time employment that supports home buying and increased consumption in the economy.
“But, that’s because all the ‘baby boomers’ are retiring.
Okay, let’s strip them all out.
And…wage growth remains non-existent.
Yes…the economy has indeed grown since the recessionary lows, but “strong” is not exactly the word to use. Furthermore, the bounce from the 2016 slowdown coincides directly with the billions spent on natural disaster recovery from 2017. That “stimulus” has likely reached its end.
As Doug Kass noted late on Friday, the Citigroup Surprise index doesn’t really agree with Mr. Powell’s statement either.
And neither did traders.
“Today was by far the slowest volume trading day of the year, not including the half day on July 3rd. “ – Doug Kass
And bonds simply aren’t “buying it.”
Nonetheless, stocks not only hit all-time highs on Friday, but by the mainstream media’s measures it also qualifies as the longest bull market in history.
My friend, David Rosenberg from Gluskin-Sheff, brought a little sanity back to the conversation:
“Keep in context how weird it is to have the longest bull market in equities in the context of the weakest economic expansion of all time, and how do you square that circle? It’s because of the long arm of the central banks.”
While the Fed is in the process of trying to reduce their balance sheet, there is still plenty of liquidity sloshing around as financial conditions remain extremely easy.
And timely injections of liquidity into the financial markets never hurts.
While the market was temporarily distracted by “Jerome Powell” on Friday in the rush to push the S&P 500 to “all-time highs” (insert roar of crowd), earnings season is coming to its conclusion and all eyes will refocus back on trade, tariffs, and geopolitical risks.
I noted the biggest threats we are watching last weekend:
- Technical deviations
- Emerging market debt and economic stabilities
- U.S. dollar strength
- Oil prices (below $60)
- Interest rates (Fed)
- Economic strength
- Earnings
- Leverage (Margin)
As I stated then, the issue isn’t any one of them in particular – but the linkages between all of them which is important to watch.
We can now add back to that list:
- Geopolitical Risk (China, Russia & North Korea)
- Tariffs
- Trade
- The Fed
Again, it is never just “one thing” that causes a reversion. Rather, it is the “one thing” that triggers the cascade of dominoes to fall.
Unfortunately, we generally never know what the “one thing” is until after the fact. This is why having a plan to manage risk, a discipline to act, and a process to follow which is critically important to long-term investing success
