- Benjamin F. Edwards - https://benjaminfedwards.com -

Wake Me When It’s Over

By Pete Biebel, Senior Vice President

Stocks had a disappointing performance last week, especially considering that the major averages all finished the previous Friday at record highs.  Trading action was disappointing not only because prices declined, but also because of the general dullness in the market.  Other than a couple knee-jerk reactions to trade war and Fed news, price action for nearly all of the week was a yawner.  Traders seemed content to snooze through the week, expecting little volatility until just after the Fed’s wake-up call announcement next week.

The major averages lost between ½% and 1 ½% for the week.  That in itself was no big deal.  The disappointment was that there was virtually no follow-through to the previous week’s record closing high.  Following some hopeful optimism on U.S./China trade talks from Treasury Secretary Mnuchin, the averages all gapped-up Monday morning. Unfortunately, they hit what ultimately was their high of the week in the opening minutes of trading.  The opening surge apparently sapped the last of the buyers’ strength as they seemed to go into siesta mode for the next several days.

The only other rush of buying in the week came Thursday afternoon following an appearance by New York Fed President Williams.  His comment that, “It’s better to take preventative action than wait for disaster to unfold,” was seen as increasing the likelihood of a 50-basis point rate cut at the upcoming meeting.  Not surprisingly, the response rallied the averages off their lows of the week and erased much of the day’s earlier losses.  The gains might have been larger except that Williams later clarified that he was speaking from a historical perspective and not with respect to the late-July Fed meeting.

The disappointing week ended with a disappointing Friday.  The averages gapped slightly higher on the opening, but trended lower from there.  The indices closed out the day near their lows of the day and the week.

One factor that helped to reduce the sleepiness last week was that it was the first big week of the new earnings season.  Many of the announcements triggered catatonic spasms in the stocks of the reporting companies while the rest of the market dozed.  Thus far, with about 15% of the S&P component companies reporting, earnings are running about 2.1% below year-ago levels.  Analysts on balance had expected a decline of 3%.

The best performing U.S. equity sectors last week, Consumer Staples and Basic Materials, barely registered a net gain for the week.  The worst sectors, Energy and Communication Services lost 2.6% and 3.2% respectively.  Energy stocks were weighed down by Crude Oil, which had its worst week since May, losing 7 ½% for the week even net of a Friday rebound.  Some of the biggest losers in Communication Services were companies that were among the those reporting less than stellar earnings in their quarterly reports last week.

Again last week, small-cap stocks disappointed.  I have repeatedly pointed out that the Russell 2000 Index (RUT) has been lagging the major averages.  My theory has been that the overall market isn’t going to go far if the small-cap stocks continue to dawdle.  Over the past five weeks, the three major averages have net gains of between 3% and 4 ½%.  RUT’s net gain over that stretch is a mere 1.24%.  Last week, RUT’s loss (-1.4%) was worse than any of the major averages.  It’s dropped back to just 2% above its 200-day moving average.  If RUT continues its sleepy performance over the next two weeks, it’s likely to cause bad dreams for the rest of the market.

One area that has shone brightly over the past several weeks is precious metals.  Gold has gained more than 6% in the past five weeks and more than 10% over the past two months to its highest level in more than six years.  Silver has spiked more than 7% in just the past two weeks, lifting it to a gain of more than 12% in the past two months.  Silver has been in a narrowing trading range (near ten-year lows) for the past several years.  The recent gains have left silver on the verge of a breakout.  Both metals have infamously underperformed stocks continually over the last seven or eight years.  It’s been a constant reminder that neither metal should be a full-time portfolio holding.  However, history has shown that there have been periods when gold and silver trend higher for years and dramatically outperform stocks.  This recent strength may be a sign that owning a little gold and/or silver might be a reasonable consideration for the first time in years.

This week brings an even fuller slate of quarterly reports in the new earnings season.  At least seven of the thirty DJIA component companies are due to report; that increases the potential for the Dow’s daily performance to deviate significantly from that of the broader averages.  With the Fed meeting looming next week, any surprises in economic reports this week could prompt a larger than normal reaction.  The Jobless Claims and Durable Goods numbers on Thursday and the GDP data on Friday are the greatest potential catalysts.

As was the case last week, the drama following earnings announcements may be the only entertainment this week.  Geopolitical tensions seem to be heating up (protests in China, hostile actions by Iran, even developments on Brexit), but so far, our market hasn’t seemed incline to react to any of it.  News on the U.S./China trade war can certainly move the market, but any good news seems very unlikely in the next several weeks.  The market expects about a 90% likelihood of a 25-basis point interest rate hike by the Fed next week.  I’d give it maybe an 8% chance of a 50-basis point hike and a 2% chance of no hike.  Any developments that shifts those odds significantly will generate a sharp market reaction.

I still believe the market is at an inflection point.  We could be waking up to either the beginning of a melt-up rally or the end of the dream.  As I wrote last week, if SPX can decisively clear 3025, then we could be off to the races.  Dropping below 2950 would be a concern and breaking below 2900 might signal that the race has been run.

Date Report Previous Consensus
Monday 7/22/2019 Chicago Fed National Activity Index -0.05 0.0
Tuesday 7/23/2019 FHFA Home Price Index, M/M +0.4%  +0.3%
Existing Home Sales, SAAR 5.340mm  5.340mm
Richmond Fed Manufacturing Index 3  5
Wednesday 7/24/2019 PMI Composite Flash 50.6 51.2
New Home Sales, SAAR 626K 655K
Thursday 7/25/2019 International Trade in Goods, Trade Deficit $74.6B  $72.5B
Jobless Claims 216K 210K
Durable Goods Orders, M/M -1.3%  +0.7%
Durable Goods Orders, ex-Transportation, M/M +0.3%  +0.2%
Friday 7/26/2019 Real GDP, Q/Q, SAAR +3.1% +1.9%


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