Financial Review

Backstep

…Stocks rebound a little. Backstepping on trade. Crude pops over $70. Financials stumble. Creeping toward inversion. Consumers optimistic. SCOTUS upholds travel ban because it’s not as bad as it was. Fiduciary rule dies. AMLO odds-on.

Financial Review by Sinclair Noe for 06-26-2018

DOW + 30 = 24,283
SPX + 5 = 2723
NAS + 29 = 7561
RUT + 10 = 1667
10 Y un 2.88%
OIL + 2.38 = 70.46
GOLD – 6.50 = 1259.60

Stocks bounced back from a nasty selloff yesterday, but the bounce didn’t have much zip. The Dow Industrials never shifted out of first gear, but it managed to grind its way back above the 200-day moving average at 24,280. We’ll have to see if that support level holds. The Russell 2000 index performed well, indicating that the market is still jittery over trade wars. And the Nasdaq posted a decent gain, with tech shares moving higher and Apple leading the way with a 1.2 percent gain, breaking a 3-day skid.  Yesterday’s selloff was partly sparked by elevated hostilities centered on global trade and fresh worries that Trump would limit, or halt, Chinese investment in US technology companies. Three of the four FANG stocks also reversed course. Facebook shares gained 1.4 percent, Amazon.com shares added 1.7 percent, and Netflix shares rose 3.9 percent. Only shares of Google parent Alphabet ended the session lower, down 0.6 percent. Harley-Davidson shares dropped 0.6 percent after Trump threatened the company with higher taxes. Trump’s threat came in response to the company’s announcement on Monday that it would move production from the United States to its international facilities for some of its motorcycles shipped to the European Union.

 

Late yesterday, White House economic advisor Peter Navarro suggested the administration’s trade stance wasn’t as harsh as first indicated. Today, Trump suggested that he will ease off his demands for tough new restrictions on Chinese investment in technology industries and will rely instead a 1988 law being updated by Congress that authorizes the government to review foreign investments for national security problems. If Trump’s decision holds through June 30, when the new policies are scheduled to be announced, it would represent a significant backing away from threats the president has made against China and a possible olive branch to Beijing before the July 6 imposition of tariffs on $34 billion of Chinese goods. If it all sounds a bit unclear, it’s because the administration’s trade policies are not well defined. The strategy seems to be “ready, fire, aim.” The market seems to be discounting the idea that the trade war will escalate. Even as the rhetoric heats up and actual tariffs kick in, the whole thing just doesn’t seem to make sense, and there is the hope, or perhaps wishful thinking, that cooler heads will prevail.

 

The bull case for stocks is still strong and underpinned by expectations for year-over-year earnings-per-share growth in the second quarter that could be 20% higher. But this is a market that begs caution, and it requires attention to stock selection. For example, Caterpillar is in bear market territory, while some of the big tech names are just off recent record highs. Financials have had a rough 12-day slide. While the Dow Industrials are down almost 2% year-to-date, the XLF, or the financial sector ETF is down almost 5% year -to-date. Why are the financials so ugly right now? We may not know the answer until we start seeing second quarter earnings results. The question is whether banks are actually lending or just trying to get by on their trading desks and investment banking. It has been an extremely strong year for dealmaking, with global M&A action topping $2 trillion.

 

By the way, if you were wondering if Walgreens replacing General Electric in the Dow Industrial average was somehow goofing with the numbers today – no not really. The Dow Average isn’t really an average, it is a price weighted average, meaning they use a divisor of 0.145 for every stock in the Dow, so any stock that moves $1, affects the Dow with a price swing of almost 7 points. Walgreens was down slightly today, while GE was up 7.8 percent to lead the S&P – so, no the change didn’t have an advantage for the Dow.

 

Crude oil delivered a strong pop, up 3.5% and cleared the $70 dollar a barrel threshold for the first time in more than a month. Oil prices moved up after reports of outages in Canada and ongoing uncertainty in Libya. Also, a report that the US is pushing countries to cut Iran oil imports to zero by November. That may be a bit unrealistic. Despite threats, the oil will probably find its way to markets one way or another. The market seems to have digested the news of higher OPEC+ production and is now moving on. The increase from OPEC+ may only reach 600,000 bpd or so, while the outages in a series of countries are accumulating. And it seems oil prices tend to move higher just before a holiday, purely coincidental, I’m sure. Energy stocks added the most gains among the S&P 500’s 11 major sectors, climbing 1.4 percent.

 

Meanwhile, keep a close eye on the flattening yield curve. The yield curve is basically the difference between interest rates on short-term United States government bonds and long-term government bonds, and the benchmark here is the difference between the 2-year Treasury note and 10-year Treasury notes. Right now, the difference is just 34 basis points, less than half a percentage point. In a healthy economy, long term yields would be much higher than short term yields, reflecting the idea that there will be solid long term growth in the economy. When the gap between short-term interest rates and long-term rates is shrinking, or flattening, it indicates traders are concerned about long term growth. If long term rates drop down lower than short term rates – a condition known as an inversion – well that usually means we are heading into a recession. Every recession of the past 60 years has been preceded by an inverted yield curve. One reason the yield curve is so important is that it makes lending less profitable. Banks borrow money at short term rates and lend at long term rates – the difference is the profit banks make on loans. When the yield curve inverts, the short term rates are higher than the long term rates and lending becomes unprofitable, which means banks stop lending, the money stops flowing, the economy comes to a grinding halt – in other words – a recession.

 

Americans are still very optimistic about the U.S. economy, but a little less so than they were a month ago. The Conference Board’s consumer confidence index slid to 126.4 this month from a revised 128.8 in May. Earlier this year, the index hit an 18-year high of 130. The present situation index, a measure of how the economy is doing right now, was basically flat at 161.1. The expectations index that looks six months into the future declined to 103.2 from 107.2.

 

The Supreme Court upheld Trump’s latest ban on travel to the U.S. by people from several Muslim-majority countries. The ban, the third iteration of the policy, is in some respects a more measured attempt to restrict travel than earlier efforts, which suffered a string of legal setbacks in the federal courts. The initial travel ban covered seven countries, all of them majority Muslim: Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen. It included permanent residents of the US (at least until the administration clarified it didn’t). It included Iraqi citizens who had served as translators in Iraq, and Christian families attempting to flee persecution. It covered refugees from around the world. It allowed people arriving in the United States, with valid visas, to be detained and sent back once they got here. It made no exceptions and showed no mercy. The current ban covers five of the seven originally banned countries — Iraq and Sudan have been dropped. It exempts green card holders and anyone who held a valid visa to come to the US as of the date the proclamation was issued. Foreign students are all but exempted from the ban (among the five banned Muslim-majority countries, only one ban — Syria — includes student visa holders). Temporary foreign workers from Libya, Somalia, and Yemen are allowed in. And (at least in theory) any visa applicant has a shot at a waiver from the ban. And there’s no longer a refugee ban to go along with the country-based ban. The current ban affects less than half the number of people as the initial ban back in January 2017. The changes — what skeptical judges have called the “cleansing” of the travel ban — make it harder to challenge in court. They also dull resistance. Welcome to the new normal.

 

Retirement investors, you’re back on your own. Just a year after it took partial effect, the so-called fiduciary rule — a requirement that financial professionals put their customers’ interests ahead of their own with retirement accounts — has effectively died. Last week, a federal appeals court dealt a final blow to the rule. The court decision said the Department of Labor, which oversees retirement accounts, overstepped its authority. The department did not try to defend the rule after the appeals court’s initial decision, experts said, and it let a deadline pass to petition the Supreme Court to hear the case.

 

A week from today, we will know the outcome of the Mexican presidential election. The odds-on favorite in the July 1st election is Andres Manuel Lopez Obrador, commonly known as AMLO. Pledging to clean up government, reduce inequality and subdue gang violence, AMLO promises to “transform” a country he says has been debased by the few at the expense of the many. AMLO is a staunch opponent of a border wall and he opposes renegotiating NAFTA. Should be interesting.

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