1. Weekly Market Update: A slightly lower week for stocks...The Dog Days of Summer are officially here and volumes are low. However, late Friday tensions and tempers flared in the Strait of Hormuz as Iran seized two British flagged oil tankers. The incident comes a day after President Donald Trump said a U.S. Navy ship destroyed an Iranian drone in the strait. We'll see if this issue has legs and bleeds into Monday. Looking forward, markets await a monumentally important interest rate move by the Fed, and there are a number of other cross-currents to grapple with. Below we take a look at Fear, Flows, Greed, Earnings, interest rates and an arcane market theory.
2. Earnings: Second Quarter Earnings reports have begun to trickle in. As of late Thursday afternoon 15.3% of the S&P 500's market cap reported 2Q results. So far: Earnings are beating by 6.8%, with 81% of companies exceeding their bottom-line estimates. This compares to 5.5% and 71% over the past 3 years. 2Q expectations are for revenues, earnings, and EPS growth of 1.5%, -2.1%, and +0.2%, respectively. Earnings per share is on pace for +2.3% gain, assuming a typical beat rate for the remainder of the season.
3. Trade: Not Much Happening, Markets Don’t Not Seem to Mind…U.S. and Chinese senior officials spoke by phone Thursday. There were no details released on what was discussed, and there was no announcement of a follow-up face to face meeting, which some had been hoping for. The deep differences between the two sides point to slow progress. Since the Trump White House increased tariffs on $200 billion of Chinese imports from 10% to 25% on Friday 5/10/19, i.e., just over 2 months ago, the S&P 500 has achieved 6 all-time closing highs.
4. Easing: We’ll say it again…”Don’t Fight the Fed.” Thursday markets reacted to a speech by NY Federal Reserve Bank President John Williams in which he said central banks should move quickly when they see signs of trouble as referring to upcoming policy actions. A New York Fed spokeswoman later clarified that Williams’s remarks were “an academic speech on 20 years of research” rather than a short-term signal. Whatever Williams meant to say, there is no getting away from market expectations of a cut at the next meeting in late July -- it’s just the magnitude that’s still under debate. Meanwhile, the European Central Bank (ECB) is expected to signal further easing at its meeting next week and the June ECB minutes confirm broad support for easing…..After the Cuts Begin - The Fed has initiated 5 rate cutting cycles since 1990, i.e., in 1990, 1995, 1998, 2001 and in 2007. In the 1-year following its 7/13/90 initial rate cut, the S&P 500 gained +3.5%. In the 1-year following its 7/06/95 initial rate cut, the S&P 500 gained +18.7%. In the 1-year following its 9/29/98 initial rate cut, the S&P 500 gained +20.9%. In the 1-year following its 1/03/01 initial rate cut, the S&P 500 lost 13.5%. In the 1-year following its 9/18/07 initial rate cut, the S&P 500 lost 20.6% (source: BTN Research).
5. No Bull: Dow Theory forms one of the cornerstones of technical analysis. Though the theory was formulated by Charles Dow (who helped found Dow Jones & Company) all the way back in the late 1800's, it is still widely followed by analysts and traders to this day. Among the major tenets of this theory is that the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) must confirm each other. The two averages should make new highs at or around the same time to give added confidence that the uptrend is real. As shown on the nearby chart, the DJIA (in green) just made a new all-time closing high on Monday. However, the DJTA (in orange) is lagging by 5-6%. What does this signify about the current market? If you subscribe to Dow Theory, we just don't have a true bull market until the Transports make a new high.
6. Fear & Greed and Mutual Fund Flows: It is a worthwhile exercise to keep an eye on investor sentiment and fund flows. Both sentiment and flows can be good contrary indicators of market direction. Typically investors fear the most, and sell the most, when markets are bottoming, not topping. At market tops, investors are buying and feeling good, even greedy. So it is curious that, according to the Investment company institute, every single category of equity funds had outflows this week. Despite the market’s great run, equity fund outflows have been very large over the past year. As shown in the chart below, more than $320bn has flowed out of equity funds over the past year, more than any other 52-week period in the history. Even at the height of the financial crisis, investors were pulling substantially less from funds. It is notable that CNN’s Fear & Greed Index, a measure of investor emotions, flipped from Greed last week, to Fear this week. It has been said that “markets climb a wall of worry.” There seems to be a lot of worry out there now.
7. So given the level of Investor fear, what’s the best course of action? This week, Larry Fink, co-founder of the world’s largest money manager (Blackrock), said many of his clients and hedge funds are taking risk off the table. However, he believes such a move is a mistake, and he advised investors to stay invested in stocks. “People are under-invested in equities ... with the change of tone of central bank behavior and you’re starting to see corporate earnings coming in pretty well,” he explained. “We are still constructive on the world.” See Fink’s extended comments below.
What We're Reading...
- People are Under-invested in Equities – Blackrock CEO Larry Fink Says, Playing it Too Safe is a Mistake. (CNBC) - Rob
- Congress Is Coming for Your IRA – (WSJ) - Deirdre
- I’ve Saved $18,000 by Adopting a Zero Waste Lifestyle (Money.com) –Suellen
- Learn Like an Athlete (David Perell) – Toni
- Former MLB star A-Rod Wants to Stop Athletes From Going Broke (CNBC) – Katie