March 15, 2019
Making Cents of the Markets
Be in the Know
Boeing and Brexit led the headlines though ultimately, the positive momentum from last Friday’s close continued and the markets resumed their rebound, making back what they dropped last week.
The drop in the Dow on Monday morning illustrated how a single stock in a 30 company index can severely influence the headline figure. The S&P500 opened positive while the Dow opened negative solely because of BA. It’s why we can get frustrated when the headlines quote how many points the Dow has gained or lost. It’s not the best index to use as an indicator of how the markets are performing but since it’s almost ten times bigger than the S&P500 (25,849 vs 2,822), the point swings can be more attention grabbing.
Brexit went through 3 different votes – Tuesday, Wednesday AND Thursday – concluding with a decision yesterday to delay the exit pending EU approval. Essentially, they are back to the drawing board which is better than the alternative of trying to leave without a deal or a plan in place which would just be a messy disaster.
On the macro fundamental side, US inflation is under control which makes holding off on interest rate increases much easier. Wholesale prices were up a mild 1.9% year over year and CPI picked up after a 4 month slide but is still just 1.5% year over year, both keeping inflation concerns in check. Weekly jobless claims came in a little higher than expected (229k vs 225k) but the market shrugged it off. We’d expect the yield on the 10 year to rise as investors sell off bonds to put money to work in the markets but that isn’t happening yet. The Benchmark Bond held steady this week in the 2.6% range. It is a little concerning that the yield curve is so flat (3 month: 2.45%, 2 year: 2.45%, 10 year: 2.60%), and the spread was under 20bps all week, making it the longest low streak in this cycle.
The meeting between Presidents Trump and Xi was delayed until at least April but they said a deal could be reached ahead of that. Sentiment was positive after the US leader said about the deal, “we’re going to know over the next three to four weeks”. Both sides are feeling the pressure to finalize something, especially as more weak economic data out of China was released. Their unemployment rate increased to 5.3% from 4.9% over the last two months and industrial output is experiencing the lowest growth (but still growing) in 17 years. This could be why we are hearing China now say they will treat US companies more fairly, including better safeguards for intellectual property – one of the bigger sticking points for US negotiators.
On the back of this, the S&P500 broke out and closed above the 2800 point level, a bullish technical signal for certain. It’s tried to stay above it before though so we are still a bit cautious. Will it hold through next week and lead to the next upward leg back to the September peak? The breadth and volume would suggest it’s likely but we will also want to see a few other support signals as well. It would be good to see the US 10 year rate start to climb a little.
As we’ve mentioned previously, we believe markets will continue to climb back to their September levels especially when a deal between the US and China is made official, which seems to be getting closer. This correction is likely to end up similar to the ones we experienced in 2011, 2014, 2015 and 2016. Eventually a recession will change the momentum but not in the short term and as such, we feel there is still more growth ahead.
Each year there seems to be some sort of bad news both on a market level and on individual companies – such as Boeing – which is why diligent risk management is important. We have exit strategies on both upper and lower levels for our positions. For instance, we had fortunately sold Boeing proactively a month ago for a profit, sidestepping this volatility and not having to wait for a stop loss alert.
We look to take advantage of the fundamental strength of the US and with technical signs more positive, we’ve been slowly putting cash to work. We have a number of stocks on our farm team and if the market momentum holds, we’ll continue to pick some up.
Chart of the Week
S&P500 Market Breadth:
Beyond the Markets
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Listen to this week’s Making Cents of the Markets on CKNW. We talked about the indicators of a global slowdown, investing during political uncertainty, and what to expect from a good financial advisor! Listen here.