By Pete Biebel, Senior Vice PresidentPrint This Post
Pretty much all around the world, stocks had a great week last week. The S&P 500 Index (SPX) hit a new high and ended the week with a 2.2% net gain. The Dow Jones Industrial Average (DJIA) climbed 2.4% but fell just short of reaching its old highs. The NASDAQ Composite Index was the big winner, tacking on just over 3%, but it’s still about 2% below its early-May record high. In the U.S. and in many international markets, nearly all, if not all of the week’s gains came in response to central bank prestidigitation.
Monday was a relatively quiet day as is often the case in the days immediately preceding a Fed policy announcement. In fact, most of the trading activity in most of the week’s sessions was lifeless. Just two brief bouts of levitation accounted for nearly all of the upside for the week. Early Tuesday brought the first magical advance. That morning, the European Central Bank President, Mario Draghi, pulled a rabbit out of his hat. He announced that the ECB could roll out a fresh round of stimulus as soon as its July policy meeting. And, abracadabra, markets worldwide shot higher. The major averages here were all up well over 1% in the early minutes of trading.
Following those opening gains on Tuesday, the market fell into a trance for the remainder of the day and the first half of Wednesday. The Fed policy announcement that afternoon brought no hocus pocus: The Committee left their target rate unchanged, as expected. A flurry of volatility up and down left the averages about where they’d been just before the announcement. Then, Fed Chair Powell did his own bit of magic in his press conference at 2:30 EDT. His dovish incantations conjured illusions of lower rates in the near future, and stocks floated higher for the remainder of the day.
Enchanted by this new clarity in the Fed’s stance, shazam, stocks ripped higher Thursday morning. No doubt some of that gain was fueled by a rush of position adjusting forced on traders with the quadruple-witching options and futures expiration just a day away. The opening gains of 1% or more on Thursday pretty much ended the magic for the week. The three major averages all ended the week at or below the level of their Thursday morning highs.
The promise of potentially lower interest rates combined with suddenly escalating geopolitical tensions produced supernatural results in other markets as well. Bonds, of course, rallied steeply. The yield on the Ten-Year Treasury Notes dropped below 2% for the first time in 2 ½ years. Lower interest rates weaken the currency, so the U.S. Dollar, after hitting a two-year high in May, dropped to its lowest level in two months. A weaker Dollar is bullish for commodity prices; and, geopolitical unrest in the Middle-East was doubly bullish for Crude Oil and Gold. Crude had its best week in 2 ½ years, climbing over 5% on Thursday and another 0.6% on Friday for a weekly gain of 8.8%. Crude could be on its way to $60. That would probably be a boost for many stocks in the Energy sector, but it might not be welcome news for the rest of the market. Gold was up more than 4% for the week, lifting its gain for the past four weeks to more than 9%. Gold futures on the NYMEX settled Friday just above $1400, their highest level in more than five years.
Can the magic continue? Will the easy-money spell that the central banks cast upon the markets last week hold for more than just a day or two? The lack of follow-through on Friday is a hint that the magic may have already lost its charm. Last week’s burst in SPX was reminiscent of its late-April run to a new high. Following a week or two stalled at the 2900 level, when SPX finally broke free of that level, it rocketed to just beyond the old high, but that was it. Flameout. The index tumbled lower through, what turned out to be, a lousy month of May.
At the time of that April high, in Take Me Out to the Ballgame, I wrote “Still, now may not be the most appropriate time to swing for the fences. My guess is that, at best, SPX might get up into the ballpark of the 3025 level in the coming month or two. Adding equity exposure now risks the likelihood of having to ride out an intermediate-term timeout/pullback before the market has the potential for any significant new appreciation.” I believe that’s the case again.
Even fairly minor follow-through gains this week could keep the spell alive. And, the averages could afford a short-term pullback without causing last week’s magic to disappear. As long as SPX can hold near the 2900 level, the potential for a run to 3000 or beyond is still in the cards.
As if trying to watch both hands of a close-up magician, traders this week will be closely scrutinizing any developments emanating in advance of the G-20 summit or the building discord with Iran. The Durable Goods Orders data on Wednesday and the GDP update the following day seem to be the key economic reports this week that could either extend or break the easy-money spell.
|Monday 6/24/2019||Chicago Fed National Activity Index||-0.45||-0.18|
|Dallas Fed Manufacturing Survey||-5.3||-1.0|
|Tuesday 6/25/2019||S&P Core Logic Case-Shiller Home Price Index, M/M||+0.1%||+0.2%|
|FHFA House Price Index, M/M||+0.1%||+0.2%|
|New Home Sales, SAAR||673K||680K|
|Wednesday 6/26/2019||Durable Goods Orders, M/M||-2.1%||0.0%|
|Durable Goods Orders, ex-Transportation, M/M||0.0%||+0.1%|
|International Trade in Goods, Trade Deficit||$72.1B||$71.9B|
|Thursday 6/27/2019||Initial Jobless Claims||216K||218K|
|GDP, Q/Q, SAAR||+3.1%||+3.1%|
|Pending Home Sales Index, M/M||-1.5%||+0.6%|
|Kansas City Fed Manufacturing Index||4||4|
|Friday 6/28/2019||G-20 Summit begins in Osaka, Japan|
|Personal Income & Outlays, Income, M/M||+0.5%||+0.3%|
|Personal Income & Outlays, Spending, M/M||+0.3%||+0.4%|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market