Friday, August 24, 2018

Riding the Bull to Nirvana?

The S&P 500 and Nasdaq Composite reached all-time highs on Friday as Netflix shares rose. The broader market also climbed after the top Federal Reserve official characterized the U.S. economy as "strong."

The S&P 500 rose 0.6 percent, led by gains in materials and tech. The tech-heavy Nasdaq advanced 0.8 percent.

Netflix rose 5.1 percent on Friday after analysts at SunTrust upgraded the stock, noting it will keep going higher because of its success overseas. The stock has had a strong week, gaining more than 10 percent this week.

The Dow Jones Industrial Average rose 134 points as DowDuPont outperformed.

Fed Chair Jerome Powell delivered a speech at the Jackson Hole Symposium in Wyoming, where leading central bankers met to discuss the future of monetary policy.

Powell said he sees "further, gradual" rate hikes moving forward, noting the economy is "strong" and can handle tighter monetary policy.

"The market wasn't sure how hawkish he was going to be," said Shawn Cruz, manager of trader strategy at TD Ameritrade. "I think the biggest takeaway from the speech is he doesn't see inflation rising meaningfully above 2 percent, ... so a gradual pace of rate hikes is still appropriate."

The dollar fell to trade 0.6 percent lower against a basket of currencies following Powell's speech.

Sentiment was also boosted by strong earnings and solid economic data being reported earlier this week.

Retailers Lowe's and Target reported better-than-expected earnings this week, sending their shares up 9.4 percent and 4.4 percent, respectively, through Thursday's close.

Target CEO Brian Cornell raved about the state of the economy after the company's results were released, noting: "There's no doubt that, like others, we're currently benefiting from a very strong consumer environment — perhaps the strongest I've seen in my career."

President Donald Trump included Cornell's comments in a tweet, calling it "a big statement from a top executive."



Meanwhile, weekly jobless claims fell to 210,000, near levels not seen since 1969. Core durable goods orders rose 1.4 percent in July, more than the expected 0.4 percent increase.

"The numbers show the economy is strong and the consumer keeps spending," said Tim Courtney, chief investment officer at Exencial Wealth Advisors. But investors are not pricing "stories that could add risk to the market."

The strong results from retailers helped put the major indexes on track for slight weekly gains as investors also shook off renewed legal worries surrounding Trump. The S&P 500 and Nasdaq are up 0.2 percent and 0.8 percent, respectively, through Thursday's close. The Dow was flat for the week coming into Friday's session.

Michael Cohen, Trump's former personal lawyer, pleaded guilty on Tuesday to eight counts related to tax fraud, campaign contributions, making false statements to a financial institution and unlawful corporate contributions. Cohen also admitted to making payments to two women at the direction of Trump. Meanwhile, former Trump campaign manager Paul Manafort was found guilty on eight counts in a separate case.

Investors also grappled with trade fears as the U.S. and China concluded talks this week with no major breakthrough. Earlier this week, tariffs against U.S. and Chinese goods came into effect.
So stocks end the week on record highs led by two growth sectors, consumer discretionary (XLY) and technology (XLK), both of which have been on fire since early 2016 when we had a mini growth scare:



Now, Amazon and Netflix make up just under 30% of the consumer discretionary ETF (XLY) which explains why the two charts look alike, but there are many other companies in this index doing very well.

What led to stocks having a great day today? Even before Fed chairman Powell spoke, St. Louis Federal Reserve President James Bullard was on CNBC early this morning stating he does not want the central bank to raise rates again this year:
"If it was just me, I'd stand pat where we are and I'd try to react to data as it comes in," he said Friday in an interview with CNBC's Steve Liesman. "I just don't see much inflation pressure. ... I'm an inflation hawk, but I just don't see that developing. ... I just don't think this is a situation where we have to be pre-emptive."

Market watchers widely anticipate a hike a Fed rate increase on Sept. 26 and possibly one more in December. The Fed has been on a rate-hiking cycle since December 2015, raising rates seven times, after keeping the funds rate near zero for seven years.

Bullard said he'd focus on inflation data and inflation expectations to change his views. Currently the numbers are not pointing to "much inflation," he noted in the interview, which aired on "Squawk Box."

He also said he believes economic growth will slow next year.

"I think it's going to be a good year, and part of that is fiscal stimulus," he said. "But the point is, it's going to slow in 2019 and 2020. That's the standard forecast that's out there."
Interestingly, Bullard also said we should be careful with the yield curve, noting Bernanke and others who ignored a flattening yield curve in the past ended up being wrong.

You don't need to convince me. I've been warning my readers not to ignore the yield curve since April and back in July, I explicitly warned beware of the flattening yield curve.

The slowdown is already underway, you see it in leading indicators like the yield curve and US and global PMIs but people are only focused on jobs and don't realize, it's as good as it gets for the US consumer.

Still, stocks don't care, they keep making record highs led by record buybacks and billions in CTA funds chasing trends higher and higher.

And the trend can continue. Cormac Mullen of Bloomberg reports, September Set Up Nicely for U.S. Momentum Rally, Nomura Says:
A combination of seasonality and a tax calendar effect sets up September for a potentially strong rally in U.S. momentum stocks, according to Nomura Holdings Inc.

Since 1984, September has shown the second-best average monthly returns for one-year momentum strategies, wrote strategist Charlie McElligott in a note to clients Wednesday. The fact that it is a quarter-end month, which overlaps with many mutual fund year-ends, is likely behind the outperformance, he said.

“This in turn drives out-sized tax loss selling, or behavior where institutional investors abandon ‘losers’ to avoid reporting embarrassing ownership,” he wrote. “In addition, you too will see elements of mark-ups or window-dressing, where fund managers will buy ‘winners’ to create the appearance that they have captured alpha and found the right stocks over the quarter.”

Momentum investing, buying stocks which are in an uptrend and selling those that are falling, has been one of the best performing strategies over the last year. A portfolio of U.S. momentum stocks chosen by Bloomberg has risen over 8 percent in the last 12-months, handily beating the 12 percent decline in a basket of value shares.

While value shares have shown some signs in recent weeks of staging a comeback, this just creates an additional “attractive entry point” for momentum, according to McElligott.

Still, investors should be ready to take profits should the September seasonality hold, the strategist said, as a withdrawal of monetary stimulus from the world’s central banks could impact markets toward the end of the year.

“By late October, we should again see heightened cross-asset volatility off the back of the negative impact of what will be a large “Quantitative Tightening” impulse via the Fed/ECB/BOJ,” he said.
Got that? While some are telling you to ride out the bull until the yield curve inverts, I'd be a lot more cautious here.

Everybody is chasing US stocks but global stocks are weak and having a dismal year. While some think this is the time to jump on global equities, their theory is just based on mean reversion, and I would ignore their advice.

Risks are rising all over the world, deflation demons are awakening from their nap, and they will come back with a vengeance over the next two years.

You can take risks in the stock market but be careful not to overstay your welcome.

These markets are very illusory, all seems fine until it isn't.

Keep that in mind the next time you read an article about the "longest bull market in history".

It's all bull and it's bad for you!

Below, St. Louis Fed President James Bullard joins CNBC's Steve Liesman to discuss the yield curve and the neutral fed funds rate from the Fed's Jackson Hole conference.

Love Bullard, he and Neel Kashkari get it, not sure about the rest of the Fed.

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