By Pete Biebel, Senior Vice PresidentPrint This Post
Vacations are a great time for observation, reflection and contemplation. I’d like to share with you several observations that occurred to me during a recent week at the beach. First, the beach is a great place for people watching. I know art fairs and airports are good people watching venues but spend just a couple hours at the beach and you’ll see what I mean. Second, contrary to what television scriptwriters would lead us to believe, not everyone at the beach is beautiful. You won’t need to wait too long before you’ll spot one or two tourists with more belly than all the Baywatch lifeguards combined. Third, tattoos! Young and old, male and female, svelte and portly, hairy and not, the percentage of beachgoers with tattoos is way higher than I would have guessed. And it’s not just a little butterfly here or a “Semper Fi” there, they seem to come in bunches. Apparently, you can’t have just one. The tattoo parlors must give discounts to repeat customers: “frequent-inkers.”
Fourth, it’s easy for even long-term investors to get a little anxious when the market suffers big swings in both directions day after day after day, as it has been wont to do of late. The cable business channels provide an endless flow of handwringing over the minute-to-minute market gyrations. I get it. They need to talk about something, and if that “something” is always changing, then it makes for more exciting TV. Long-term is boring. Don’t get drawn in. Treat this erstwhile flow of information the same way you treat a flight attendant’s monologue about exit rows and oxygen masks.
So far, there’s no reason to panic. The greater your confidence that you are well positioned for the long run, given your particular circumstance, the less you need to worry about the short-term. That’s true even during volatile times. But, the increasing volatility and the big daily ranges suggest that it might be a good time to pay closer attention. The market is in a sorta in-between state, waiting to see which way the news goes on the trade war and on Fed policy.
The market is a composite of the expectations of all the participants. Some, like large institutional money managers, have a little more sway over the market’s temperament than you or I do. Still, the shifting money flows define the market’s mood. We know that at any point in time, the short-term mood can deviate from the longer-term mood. Every long-term uptrend has many short-term pullbacks. The market’s long-term mood was in a pretty happy place until about a year ago. Since then, it’s thrown a couple tantrums, but each time, it just needed a little nap to restore its bullish disposition. Recent market behavior suggests that it’s getting a little cranky again. The reason I believe the market’s mood requires closer attention is that when it turns sour it can get really ugly really fast.
Market declines, when they occur, are usually faster and steeper than the rally phases. That bias has probably been increased over the past ten years as more and more of the day-to-day market activity has shifted to more mechanical, auto-pilot programs. When the market is trending higher, those programs continue to buy irrespective of value. The danger comes when the market indices drop below key levels forcing those mechanical programs to be sellers irrespective of value. I wrote about this phenomenon in late-2018 when the market endured repeated air-pocket declines.
Net for the week, the major averages all gained about 3%, a significant contribution to keeping the bullish hopes alive. But, those averages all still have net losses of 3% to about 4% over the past five weeks. Contributing to the uncertainty is a flight-to-safety mentality. Ten-Year Treasuries have rallied to an all-time high, while gold has rallied to its highest level in more than six years.
I have suggested watching the Russell 2000 Index of small-cap stocks (RUT) as a leading indicator for the overall market. RUT gained a little over 2% last week, again trailing the large-cap indices. Unlike its large-cap peers, RUT was unable to get back to the neighborhood of its recent rebound highs. RUT hits its lowest level in about seven months on Wednesday and has, so far, been unable to reclaim its 200-day moving average.
I believe that, in the weeks ahead, the two key levels I specified in early-August are still valid. Sustained trading above the 2950 level on the S&P 500 Index (SPX) would go a long way toward improving the market’s mood and eliminating the negative impact of the early-August losses. On the downside, 2875 seems to be the critical level. SPX has yo-yoed around that level for the past four weeks. It’s made several lows in the 2840 area and several highs near 2940. Dropping below 2840 would signal the beginning of another tantrum, but as an early warning, I suspect that sustained trading below 2875 would indicate that the probability that the averages could get tattooed had greatly increased.
The manufacturing data on Tuesday and the employment data at the end of the week seem to be the numbers with the most potential to surprise the market. But, as has been the case for the past few months, trade war headlines are still the most likely mood-altering possibilities in the weeks ahead.
To all our friends, family, clients, advisors and employees in the southeastern U.S. our thoughts and prayers are with you. Be safe and good luck.
|Tuesday 9/3/2019||PMI Manufacturing Index||50.4||49.9|
|ISM Manufacturing Index||51.2||51.2|
|Construction Spending, M/M||-1.3%||+0.3%|
|Wednesday 9/4/2019||Motor Vehicle Sales||16.8mm||16.9mm|
|International Trade, Trade Deficit||$55.2B||$53.5B|
|Fed Beige Book|
|Thursday 9/5/2019||ADP Employment Report||+156K||+150K|
|Non-Farm Productivity, Q/Q, SAAR||+2.3%||+2.2%|
|Unit Labor Costs, Q/Q, SAAR||+2.4%||+2.4%|
|PMI Services Index||53.0||50.9|
|Factory Orders, M/M||+0.6%||+1.0%|
|ISM Non-Manufacturing Index||53.7||54.0|
|Friday 9/6/2019||Non-Farm Payrolls, M/M||+164K||+158K|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market