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@themarket: Global Interest Rates Rise, Global Stocks Fall
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It is something we really haven't seen in quite some time. Back in the day, before the financial crisis, interest rates and stocks most often moved in opposite directions. This week investors got a taste of what the future might hold.
U.S Treasury yields on the 10-year note (the benchmark average) ticked up to 2.39 percent at one point. Across the pond, the German Bund (their benchmark) rose .5 percent. Those were big moves in the debt world. Why are interest rates on the rise all of a sudden after years of declines?
Some would say it just had to happen. Global central bank policy has just been too loose for too long. I don't necessarily agree with that view, but at the same time, our own Fed has given the markets ample warning that the time to tighten is upon us.
But before we bid adieu to their past policies, let's give all those central bankers a hand. In the absence of any fiscal help from the world's politicians, these heroes single-handedly not only pulled us away from the brink, but have guided global economies to their present state of growth. What is different this week from other weeks is the perception among investors that other central banks may now be following our lead.
Throughout the first half of the year, I wrote that it was not Trump and his promises, but low interest rates, a growing economy, and declining unemployment that was supporting the stock market. I also warned that the real arbiter of further equity gains would be the Fed and how they implemented their new tighter, monetary policy.
So far, their actions have been transparent, moderate and, to the best of their ability, telegraphed to the markets well ahead of any future moves. The problem now is that if (and right now, it is only an if) other central banks begin to tighten, than no one knows what will happen.
How will various central banks coordinate policies? What will tighter monetary policy overseas mean for our bond market yields? Will Japan start to tighten as well, and if so, what will that mean for both U.S. and European interest rates? One thing we do know is that today's traders are quick to pull the trigger before taking the time to see what transpires.
Stock indexes hit six-week lows this week. That doesn't mean much in the grand scheme of things. Granted, we hit my target on the S&P 500 Index at 2,444 weeks ago but that doesn't mean I called a "top." We could still start to rally back next week when this holiday-shortened work week is over. In the summer, when participants are on vacation and volumes are low, it is easy to manipulate the markets.
Technically, we had better rally hard in the coming week because we are hovering just over support for the S&P 500 index at 2,414. The action of technology stocks is also bothering me. It is this sector that has led the market up and it feels like we still have more to go on the downside.
But so what; I and everyone else have been waiting for a sharp, shallow sell-off of the 5-6 percent variety so let it happen. July would be an auspicious months for that. As for your portfolios, do nothing right now. If this is truly the beginning of that downdraft, I see 2,345 as the first support for the index. That would bring us down to a 4 percent decline or so. Big deal!
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Markets in Pullback Mode
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Technology stocks continued to consolidate while the Dow made new highs and the S&P 500 Index hovered just below historical highs. Throw in the fact that the markets are notoriously slow and biased to the downside during the summer months, and you have a recipe for further consolidation.
That does not necessarily mean that we will see some sharp and painful correction in stocks. My regular readers understand that the averages could simply move sideways for a month or two before resuming their upward climb. However, within those averages, individual stocks and sectors could experience much deeper declines.
Take the present decline in the technology-laden NASDAQ market, or the carnage investors have experienced in energy shares. Tech stocks are presently down almost 3 percent from last week's high, although several individual shares are down a great deal more than that. At some point, these pullbacks will have run their course.
The oil patch has seen even greater declines as the price of oil plummets, then spikes, only to fall again. But once these areas find a bottom, something else — financials, health care, utilities, etc. — could be the next group to sell off. It will depend on their price level in relation to the rest of the market.
This is the concept of "rotation," which I explained in last week's column. So while the overall averages may show little change from month-to- month, certain areas could experience substantial declines. Small cap stocks have done little all year while many other sectors have risen in price. Some traders are betting that money coming out of technology could conceivably end up in the small-cap Russell 2000 Index and financial sector.
Financials have been held back this year because of the onerous rules and regulations that encumber their business as well as the continued historically low level of interest rates. This could be another area where investors may perceive "value." Some investors have been buying the banks, expecting the beginning of a Fed-inspired, interest rate rise will help their profits.
That may not be too far off, given the actions of the central bank this week. They hiked short-term rates higher by a quarter of one percent (expected) but also revealed additional details on their plan to reduce their balance sheet by selling back trillions of dollars in bonds over the next four years or so. You should simply understand this as another form of tightening monetary policy. A rule of thumb would be $30 billion in balance sheet reduction would be roughly equal to a quarter-percent rise in the Fed Funds rate.
While no one is blaming the Fed for tightening monetary policy too soon or too fast, the fact remains that Fed Chairwoman Janet Yellen and her 12 apostles are no longer expanding monetary policy. The punch bowl of loose money is drying up, at least here in America. The hope is that the economy and the private sector are strong enough to takeover and the Fed can get back to its normal duties of playing the top cop in relation to inflation and employment.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: FOMO Fuels the Markets
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The fear of missing out (or FOMO) has supported the stock market averages this week. Although it appeared that the indexes simply marked time, appearances can be deceiving.
We made new record highs again this week as investors piled into stocks on any sign of weakness. The fear that stocks will go ever higher fueled those who are underweighted in equities to buy, buy buy. The S&P 500 Index has reached the lower end of my target (2,443) but could easily spike to 2,475, which is at the top of my range.
In bull markets, and this one certainly qualifies, I often observe traders attention move from concentrating on one set of sectors to focusing on another. Price usually dictates the move.
Take the NASDAQ 100, for example, it is the large cap technology index. This index has hit record highs in 9 out of the last 11 sessions and has been higher 24 out of the last 30 market days.
Other areas, such as semiconductors and large cap growth stocks have also been "in favor" and are now trading at nose-bleed levels. Yet, some sectors, such as small cap stocks and financials, have been lagging the market most of the year. As the price levels between the leaders and laggards widen, traders are now willing to buy those cheaper "out of favor" sectors.
We call this "Sector Rotation" and this week, despite a relatively quiet market, traders were beginning to rotate into undervalued areas. If you are sharp and can afford to watch the markets day -- in and day -- out, you can detect these behavior patterns. There are still other areas, like commodities and basic resources stocks that are still in the doldrums. You can be assured that if the markets continue to run, their day will come.
Given that the entire world (according to the media anyway) was focused on the testimony of ex-FBI Director James Comey and what the president did or did not say, do, or feel in regards to the Russian Affair, most investors missed some important developments coming out of Washington.
The Department of Labor's Fiduciary Rule becomes law today (see Thursday's column for a complete rundown). The bottom line: if you are receiving investment advice on your tax-deferred investment accounts from someone who is not a fiduciary, you better find someone who is. From now on, financial advice must be in the best interest of the client and not the adviser.
The trigger that saw financial stocks leap higher yesterday was the House's vote to replace the Dodd-Frank Wall Street Reform Law that was passed as a result of the Financial Crisis in 2008. Investors know full well that the House version of this new "Financial Choice Act" won't see the light of day in the Senate. Nonetheless, there is an expectation that the most onerous regulatory requirements of Dodd-Frank will be jettisoned, freeing up banks to make more profits and reduce their costs.
As for the rally in the Russell 2000 small cap index, the bull story is a bit more nebulous.
The thinking is that, despite the media and the Democrat's hope that Comey would provide some kind of "smoking gun," he didn't. That leaves the Trump Administration to re-focus their efforts on tax cuts, cutting regulations, etc. etc. All of the above would be good for the small-business community and thus small cap stocks. My own opinion is that the opposition parties (the media and the Democrats) are hell-bent on keeping the Russian Affair alive to its bitter end.
The hope is that the Republicans and the Trump Administration will be so encumbered by this scandal that they will be unable to govern through 2018. That would pave the way for the Democrats to regain the Senate and/or the House. If you think this is a case of Washington gone wacky, just remember, it is exactly the same strategy Republicans used throughout the eight years of the Obama presidency. Unfortunately, the real victims in this tragedy are the American people.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Markets Still on a Roll
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Additional gains propelled stocks higher this week with all three averages closing at record highs once again. Despite the fact that more and more experts are warning of a possible fall in the averages, investors continue to pile into stocks. Should you?
The short answer is no, wait for that decline, unless you have no exposure to the stock market. That would be hard for me to believe if you have been reading my column regularly. My readers also know that the threat of a pullback hangs over the market all the time since we can expect as many as 2-3 declines in the stock market every year.
The economy, however, is still growing enough, and interest rates are still low enough, to justify the present level of stock prices. Friday's nonfarm payroll data was just another example of the underlying support that is propelling stocks skyward.
The country's official unemployment rate has dropped to 4.3 percent. That is a historically low number and most economists would say we are at full employment now. That's not quite accurate, however, if you look at the "underemployment rate."
That is the number of workers who are presently working part time, but would prefer full-time work. If you add that category of workers with those who have a full-time job, you have an overall unemployment rate of 8.4 percent. That is quite a bit higher than the official rate but is still down from 8.6 percent in April and the lowest reading of the combined employment data since June 2007.
Anecdotal evidence from several CEOs around the country over the past few weeks seems to indicate that Corporate America is having an increasingly tough time filling job positions. And we are not just talking about skilled labor like engineers and IT specialists. Even service sector jobs like fast-food are crying for help.
Corporate America has had its own way when it pertained to hiring for the last decade or so. They could get all the labor they wanted, at the price they wanted. Workers, if they wanted to work, had to take whatever salary was offered, as well as a cut in benefits. Well, times are changing, and it is only a matter of time before business managers wake up to that fact.
I have been watching wage gains in the payroll reports for over two years now. The good news is wage growth has more than doubled from an anemic 1 percent 18 months ago to 2.5 percent today. Granted, the gains are up and down, depending on the time of the year, but the trend is your friend if you are a U.S. worker. And that just adds more support to the markets, since consumer spending is the lynchpin of what makes this country grow. Higher wages means higher spending, everything else being equal.
Enough about economics! The bottom line is that, regardless of what Trump, the Republicans, or the rest of the world is doing, right now the U.S. economy is in pretty good shape. As such, the markets have a cushion under them. That should keep any selloffs contained. So, sure, expect a 5-6 percent pullback any day, week, or month now, but don't let that get you down. It is the nature of investing. In the meantime, enjoy your gains.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: Markets Climb Higher
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In the absence of any earth-shaking news, stocks tend to follow the recent trend. That trend, since the election has been up, so ... The question to ask: when we can logically expect that trend to change?
As readers may recall, my target for the S&P 500 Index is somewhere between 2,443 and 2,475, which I expect we will hit before the end of the second quarter. This week, we broke 2,400, regaining everything that was lost in last Wednesday's 2 percent downdraft. Now, that 2,400 price level should act as a support for the bulls.
"Are you still bullish?" asked one of my clients yesterday.
"That depends upon your time frame," I answered.
In the short-term I am, if you consider that between now and say, the end of June, the markets could tack on another 2.5 percent or so. That's not a bad return for 30-some days, and it is far better than the yield on the 10-year, U.S. Treasury Note (2. 24 percent).
However, I recognize that the odds against further gains in the medium-term (this summer) are climbing. For example, the S&P 500 has not had a 3 percent drop since the August-November, 2016 time period, nor has it had a 5 percent decline since June, 2016. Given that we have had 16 corrections of 5 percent or more since the 2009 bottom, we are overdue for some kind of larger pullback.
But in the meantime, the technology sector has been the stand-out winner so far this year. The FANG stocks (Facebook, Apple, Netflix and Google) have clearly been responsible for that leadership, representing about half the gains. Since a fair amount of their goods are bound for overseas markets, a decline in the dollar also helps sales, because it makes their products cheaper for foreign consumers. And the dollar has dropped from a high of around $103, the U.S. dollar index (DXY) is now trading slightly above $97, a substantial decline in currency terms.
Why is this important?
Well, "leadership" among stocks is a fairly important tool. When there is an expanding group of leaders in the market or a sector, it means that more and more investors are willing to pay up, believing prices are going ever higher. In this case, leadership among the leading sector of the stock market is narrowing. So much so that four stocks represent an outsized percentage of the gains.
The dollar's decline is also something that confounds a number of traders. Usually, when interest rates rise, a nation's currency rises with it. The financial markets expect interest rates to rise in the U.S. The Federal Reserve Bank, as we know, is expected to raise rates again in June.
They will also be reducing their $4.5 trillion balance sheet, which is stuffed to the gills with Treasury bonds and mortgage-backed securities.
"Shrinking the balance sheet" is just financial speak for selling bonds, rather than buying them, which they have been doing since 2008 in an effort to support and grow the economy.
When you sell bonds into the market, the tendency is for interest rates to rise. Given this two-prong rate-raising strategy, the dollar should be rising but the reverse is happening. How this will play out is something to watch.
These are simply two variables of many I follow and consider in forecasting the direction of the markets. The rise of interest rates, the path of the dollar and leadership within the stock market has me concerned but not overly so, at least not yet. Right now, my tea leaves signal steady as she goes. Of course, on a short-term basis, expect more ups and downs now that President Trump will be returning from his first foreign field trip. And remember, with him comes "The Return of the Tweet."
The intensification of the media-led, Russian witch-hunt and the expected battles over health care, the budget, and everything else that the administration has proposed will keep things unsettled and investors on their toes. As the worries mount, markets should climb towards my target range, and when they arrive, we will see what happens next so stay tuned.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
