By Pete Biebel, Senior Vice PresidentPrint This Post
Through the first three sessions of the week, the market was in a no-go mentality. A promising presidential trade-talk tweet was all it took to propel the major averages to moon-shot opening gains on Thursday morning. That go-go reaction lasted about 45 minutes and lifted both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) to new highs. The balance of the week again saw a no-go market as the averages traded sideways, even following some confirmation of the rumors on Friday. The one other market mover last week was the celebration in the wake of Boris Johnson’s overwhelming victory in the U.K. elections. The results may have caused just a ripple in the U.S. markets, but they produced a wave of gains on European exchanges.
Virtually all the market’s action for the week was packed into that opening hour on Thursday. Beyond some opening hour volatility on Tuesday and Wednesday, the averages slid listlessly lower through the first three sessions of the week. Even the price action on Wednesday afternoon following the Fed policy statement and press conference, which usually experiences a distinct spike in volatility, was a yawner. Prices advanced modestly that afternoon, but the major averages were still showing small net losses for the week at Wednesday’s close.
The lackadaisical no-go calm was shattered Thursday morning. A tweet from President Trump proclaimed, “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Over the past year, market participants had been conditioned to expect an insta-rally on any news of even a hint of progress in the trade talks. A few nanoseconds after the tweet, the computers were buying. The mania ran out of gas after about a 1% gain in the averages.
Thanks to the Thursday surge, all the major averages notched healthy gains for the week. The COMP held on for about a 0.9% net gain; SPX added a little over 0.7%. Both ended the week at record highs.
International markets had a great week. The weakness in the U.S. Dollar and the trade deal news certainly helped, but, as mentioned above, markets in Europe also rallied on the news of the solid victory by Conservatives in the U.K. election. Those results are presumed to increase the likelihood of a smooth and orderly Brexit. Markets in Germany and the U.K. hit their highest levels in 14 months late last week. International emerging markets would likely be the largest beneficiaries of a trade agreement. Markets in China and Brazil gained more than 3% for the week.
Gold had its best week in three months, gaining a little over 1%. Back in September, the price of gold hit its highest level in six years thanks to a big mid-year rally, but it has been slumping since then. So far, gold has given back about a third of the April/September advance. Upward momentum at that high was sufficiently strong to suggest that the odds of a higher high in the coming months are still pretty good.
In an interesting twist, the high-yield bond market also had a pretty good week. Keep in mind that the yield on the benchmark Ten-Year Treasury Notes was about flat for the week. Ordinarily, that would imply that junk bonds would not have had much of a move. Various measures of the junk bond market gained about 1% last week, more than the equity market. That was on top of a healthy rebound in the second half of the prior week. After falling to their lowest levels in two months early in that week, the junk bond indices have rallied to near their highs of the year. Signs of a strengthening economy and progress in the trade talks were the sparks that lit the fire in the high-yield bond market.
That stronger junk bond market and gradually increasing crude oil prices provided a little spark for MLPs. MLPs are master limited partnerships typically involved in energy transportation and storage. As a group, MLPs have trended steadily lower for the past three years. Last week’s bounce is probably just another flash in the pan rally. We’ll need to see a lot more improvement in that group before there’s much hope that a turnaround is at hand.
I have suggested in the past that the Fed’s continuing repo liquidity injections are the fuel that has most helped the averages chug higher over the past couple months. The Federal Reserve Bank of New York, the bank that implements Fed policy, announced last week that it would significantly ramp up the size of its overnight repo operations in late-December. That announcement was intended to ease concerns about a possible lock-up in overnight bank loan operations at year-end, but it might also add some buoyancy to stocks through the last couple weeks of the year.
As I wrote last week, I continue to believe that now is probably not a good time to be overly aggressive. Nevertheless, there are no signs yet that investors need to be overly conservative. The trade war news is not likely to get much better in the next few weeks. We can expect the Fed’s repos to give the market a bit of a boost, but I don’t expect we’ll see significant additional upside any time soon. The market seems likely to spend some time consolidating the advance of the past two months.
SPX ended last week just below 3190, is unlikely to climb beyond the 3200 – 3210 range over the next few weeks. That index could slip all the way back to 3070 without setting off any alarms.
This week brings a long list of economic reports. Almost every day will feature new manufacturing data of one kind or another. The data in those reports are the numbers that are most likely to trigger a market reaction this week.
|Monday 12/16/2019||Empire State Manufacturing Index||+2.9||+4.0|
|PMI Manufacturing Flash||52.6||52.5|
|PMI Services Flash||51.6||51.8|
|NAHB Housing Market Index||70||70|
|Tuesday 12/17/2019||Housing Starts, M/M||+3.8%||+2.0%|
|Industrial Production, M/M||-0.8%||+0.8%|
|JOLTS Job Openings||7.024mm||7.009mm|
|Thursday 12/19/2019||Initial Jobless Claims||252K||225K|
|Philadelphia Fed Manufacturing Index||+10.4||+8.0|
|Existing Home Sales||+1.9%||-0.4%|
|Friday 12/20/2019||3rd Quarter GDP, SAAR||+2.1%||+2.1%|
|Personal Consumption, M/M||0.0||+0.4%|
|Kansas City Fed Manufacturing Index||-3|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.