Midterm Madness?

The data on market action during midterm election years is consistent with our present thesis for the balance of 2018. That is, a volatile -- potentially rougher than your typical midterm election-year summer (read tariffs) -- with a potentially strong finish for the year. 

Consumers Still Feeling Good, For Now

While the title to the following article on the June results of The University of Michigan's monthly consumer sentiment survey (an input to our macro model) may sound concerning, 98.2 is still a strongly positive reading.

There is a looming issue, however, that we've fully expected to begin rearing its ugly head in both the consumer and business surveys (and it is!); it's clearly showing up in expectations. The survey director's commentary in the last paragraph perfectly echoes our concern:

No Dollars Lost

So what happens to all of those dollars we spend on foreign stuff in excess of what foreigners spend on U.S. stuff?

Well, each week we track "foreign portfolio investment" in the aggregate, as well as to what extent stocks and bonds contribute to the total, across a number of countries  -- and therein lies a big part of the answer. Just completed the exercise and felt inspired to offer up the following lesson.

Quote of the Day: Where might we be ex the trade issues?

Today's narrative:

Industrial Stocks and The Trade Issue

In last week's video I touched on the action in the Dow and illustrated the huge hit Boeing and Caterpillar were taking due to trade issues. 

Here's that chart of the Dow components; the two lines at the bottom represented the percent changes in Boeing and Caterpillar stocks:

People Have to Have a Reason, And the Media's Forever Willing to Accommodate -- AND -- Our Present View on the Dollar and Gold

To steal from our title this morning -- particularly when it comes to markets -- people have to have reasons, and the media's forever willing to accommodate. Apparently, however, the quality of those accommodative efforts is of secondary concern.

Note that the following headlines crossed my screen 16 minutes apart (and there was no new news on "global cues" during that quarter-hour):

6/23/2018 4:32
Gold extends gains on positive global cues

6/23/2018 4:48
Gold, silver prices fall on weak global cues

The Thinking Behind Our Top Holdings

For client subscribers in particular, we think it's important to keep you abreast of why we're doing what we're doing within portfolios. 

Below are our latest summary narratives for our top 5 sector targets:

The Current State of the Market (video)

This morning I touch on the state of the current correction, this morning's selloff, trade relationships developing outside the U.S., political risk and current conditions, all in 4 minutes.

THE Problem for the Market

As we've been harping herein continually, the current environment around trade is, in our view, the problem for the market so far this year.

Bespoke's analysis overwhelmingly agrees:

Ronald Reagan on Trade (video)

President Ronald Reagan in his August 31, 1985 radio address shared his wisdom on trade. 



HT Dan Mitchell

CFOs On Current Conditions

The first paragraph in yesterday's blog post captures our view of near-term prospects for the market:

"Clearly, global equities have little upside (and notable downside) potential as long as Washington holds the line on its current trade stance – despite a generally good macro setup (particularly in the U.S.)." 

The responses, encapsulated below, to CNBC's latest Global CFO Council Survey support that view:

Please, Don't Hold Your Breath On This Morning's Rally: Yesterday's and This Morning's Log Entry

06/21/18 (Thursday)

Clearly, global equities have little upside (and notable downside) potential as long as Washington holds the line on its current trade stance – despite a generally good macro setup (particularly in the U.S.).

Per Bloomberg this evening there’s quite the division on the issue among White House officials. Thankfully, some on the staff of the National Economic Council understand the fundamental flaws in the current path we're on:

A Quick Dive Below The Surface (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Like We Said

From our weekly message posted Monday:

The thing about the U.S.'s protectionist ambitions is that they're being imposed on virtually all of our major trading partners at the very same time. In essence, we are doing "battle" with a number of armies, none of whom are battling among themselves. In fact, our recent actions are sowing a newfound kinship among our now trade adversaries and a great deal of global deal making (that excludes us) in the process.

Putting Current Market Action In Perspective (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

 

This Week's Message: Good Time For A War? Well, That's What Pyrrhus Once Thought....

Three of the world's major central banks held their policy meetings last week and issued statements in line with what we anticipated and  expressed herein. Asset prices responded as we suggested they would as well; that is until the threat of a global trade war was thrust back onto the scene in a big way.

Podcast: This Morning's Market Angst

Consumers Are Feeling Really Good About the Here and Now, A Little Less So Going Forward, And They're Smelling Some Inflation Coming

One of the most watched consumer sentiment surveys is the one performed monthly by the University of Michigan (it's an input to our macro index). The preliminary June survey, released this morning, was interesting.

This Morning's Log Entry: A Followup To Yesterday's Blog Post

6/14/18 (Thursday)

The Fed and the ECB meetings played out precisely as we scripted  yesterday: The Fed was more hawkish with 4 hikes this year now being the consensus, and the ECB softened up by pushing QE through year-end, and announcing that – as economic things currently stand -- interest rates won’t be touched until we’re well into 2019.

The Fed Says The Economy's In "Great" Shape, And Won't Weigh In On Fiscal Policy, However.....

As you've noticed, we're not the least bit shy in expressing our concerns over the potential for an increase in protectionism between us and our trading partners. Listening this morning to Fed Chairman Powell's post-meeting press conference, he had to field a few questions on the topic.

Today's Log Entry: The Dollar vs The Euro

Currencies have my attention this week; particularly the U.S. dollar and the Euro.

Small Businesses Are Feeling Really Good!

Three of the inputs to our PWA Macro Index have to do with sentiment among small business owners; the folks who employ 2/3rds of America's working population.

This Morning's Podcast: A little on North Korea, straight scoop on trade, inflation and central banks (all in 4 minutes)

This Week's Message: Many Things Have Gotten Better With Time

Keeping this week's message brief, as there'll be quite the number of pending issues we're likely to circle back with over the next few days...

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We here at PWA, on behalf of our clients, have to set aside our personal politics -- as well as our proclivities toward optimism or pessimism -- and forever let the data instruct what we do inside of client portfolios. While I know that can be frustrating at times -- particularly when we state empirically proven facts that conflict with certain public policies -- trust me, you shouldn't want it any other way!

Quote of the Day: Moving On Up

The notion that the U.S. middle class is being "hollowed out" has been a curiously popular one for years. This morning I'm borrowing Don Boudreaux's quote of the day, including his followup comment:

A Consumer and An Economist Talk Protectionism

Experience compels me to preface the below with a statement about politics. I've found over the years that when I go to a place that conflicts with a position taken by the party in power I generally touch a few nerves. Thus, over the past few years I've devoted far less time herein than previously to topics other than those directly related to the business of investing. That said, some of the topics that tend to touch political nerves -- such as tariffs -- are indeed related to (impact) the business of investing. 

Gauging Smiles and Wrinkles

Confirmation on the strength, or lack thereof, of the economy can come from multiple sources. In that the consumer accounts for 2/3rds of U.S. economic activity, we are forever digging deep for data that instruct us as to how the everyday American is faring (we recently touched on  the presently high hotel occupancy rates).

Apple Amid the Noise

Apple's performance amid the news flow, with regard to its messaging to suppliers, of the past couple of years speaks to the importance of not  relying on media accounts, on doing your own research and on properly assessing current conditions.

Quote (and Chart) of the Day: History's Frightening Account of Tariffs

In its "Investors' Corner" article this afternoon Investors Business Daily reminds us of the history of the U.S.'s most infamous act of protectionism:

This Morning's Podcast: Trade Friction, Sanguine Stocks, Cutting Foreign Exposure (all in 6 minutes)

Chart (and quote) of the Day: Banks Well Positioned and Undervalued

Oppenheimer's Chris Kotowski shares our present view of the financial sector (our current top target weighting):

Quote of the Day: What 'Might' Happen If We Abandon the Trade War Notion?

While I'd never pretend that I could quantify to what percent a rally might ensue should we survive the current onslaught on global trade, in a note to (I presume) JP Morgan's clients today its top quantitative strategist, Marko Kolanovic, basically echoed the sentiment in our earlier blog posts, here and here:

What's Driving This Week's Rally?

The Dow's having a heck of a week! Closed over 300 points higher today alone. And while that makes some sense in that, amid a notably positive backdrop, the index was negative (-1.23%) on the year less than a week ago (5/31)  -- i.e., in theory it's only a matter of time before stock prices reflect the fundamental backdrop -- make no mistake, news that this year's primary headwind may be abating is the present  driver:

Economic Data Looks Very Good to Start June, However....

June is starting off very nicely in terms of economic data reported. Here's from our June 2018 trends file:

This Week's Message: The Folly In Forecasting

Staying with last month's theme, we'll begin this week's message by quoting from James Picerno's Nowcasting the Business Cycle:

This Morning's Podcast: Europe, Jobs, Tariffs, My Near-Term Skepticism, and General Conditions (all in 5 minutes!)