|Day's Range||35.51 - 35.51|
Wall Street's main indexes climbed on Friday, as concerns over global growth were allayed by largely upbeat U.S. jobs report and data out of China that showed factory activity expanded at its fastest pace in more than two years. The tech-heavy Nasdaq hit a record high for the first time since July, while the benchmark S&P 500 notched its fourth record high this week.
(Bloomberg Opinion) -- That was quick. It took less than 24 hours for markets to start second-guessing Federal Reserve Chair Jerome Powell, who said on Wednesday that monetary policy is in a “good place” to keep the economy growing moderately. And yet, the S&P 500 Index fell on Thursday, dropping the most in three weeks at one point and indicating doubts among traders that the economy is anywhere but a good place. Sure, the S&P 500 set another new all-time high this week, but broader measures of equities are well below their records. The New York Stock Exchange Composite Index is down 3.68% from its high reached in January 2018, while the Russell 2000 Index is 11.3% below its record set in August 2018. The trigger for the declines Thursday was a Bloomberg News report that Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a “phase one” agreement. That shouldn’t be a total surprise, though, as many traders have speculated that the impeachment hearings against President Donald Trump provide China with little incentive to a broad agreement. What was surprising was the MNI Chicago Business Barometer index, which fell to 43.2 for October from September’s 47.1 when it was forecast to rise to 48. That’s a big miss. Then, the weekly Bloomberg Consumer Comfort Index fell the most in eight years, possibly signaling more moderate household spending approaching the holiday-shopping season. If that wasn’t enough, the Federal Reserve Bank of Atlanta’s widely-follow GDPNow index that aims to track the economy in real time fell to a paltry 1.46% rate.It’s hard to criticize Powell. All else being equal, it’s better for business, consumer and investor confidence to have an optimistic central banker than one who is pessimistic. That said, it’s also good to have a central banker who doesn’t seem out of touch with reality. We’ll find out soon enough where Powell stands, with a pair of high-level economic data points scheduled to be released Friday in the form of the monthly jobs report and the Institute for Supply Management’s manufacturing index.HOW LONG OF A PAUSE?The bond market sure isn’t acting like the bar to further rate cuts is very high. After falling 4 basis points on Wednesday, yields on benchmark two-year Treasury notes dropped an additional 7 basis points to 1.53% on Thursday. The probability of another rate reduction happening at the central bank’s next policy meeting in December stands at a not-so-insignificant 30%, which is higher than where it was a month ago, according to data compiled by Bloomberg. Plus, at about 16 basis points, the gap between two- and 10-year yields is lower now than where it was before the Fed started cutting rates at the end of July. If the so-called yield curve really is a reflection of where the economy is headed, then the flattening is a sign that the bond market believes that the Fed’s three rate cuts have done nothing to spark growth. “We do not think the worst of the downside risks for the Fed have passed yet,” said Wells Fargo Securities strategist Erik Nelson.STOCKS HAVE A NEW LEADERThe U.S. economy has been described as the cleanest of the dirty shirts. In other words, while growth has slowed rapidly in the U.S., it’s still a lot better than most anywhere else in the developed world. If the recent performance of the global stock market is any indication, that narrative may be about to change. In late trading Thursday, the MSCI All-Country World Index excluding the U.S. was up 3.35% for the month of October, while the MSCI USA Index was up just 2.06%. It’s the greatest outperformance by the non-U.S. gauge since December. And while the latest monthly sentiment indexes from State Street Global Markets released Wednesday showed investors’ attitudes toward U.S. equities are languishing near all-time lows, those toward European stocks have rebounded and are approaching record highs. In that sense, the global stock market may be signaling that it doesn’t expect U.S. economic growth to get much worse, but rather growth in the rest of the world may have stopped slowing and will catch up with the U.S.RAW MATERIALS ARE HOPPINGCommodities are another market that may be signaling that the outlook for the global economy isn’t all that bad. The Bloomberg Commodity Index posted its first back-to-back monthly increase in September and October since January and February. The gains have been broad-based, with the energy, agriculture and industrial metals sectors all rising for the month. The World Bank isn’t too optimistic the gains will continue. The organization on Tuesday cut its price forecast for commodities, saying slower global growth will sap demand for energy, metals and crops. “Expectations for global growth both for 2019 and 2020 have been revised down substantially, including in emerging market and developing economies,” the World Bank said in the report. To be sure, such organizations don’t have the greatest track records in making forecasts, often reacting to the data instead of anticipating trends the way markets do.SHADOW ECONOMY SHRINKSIt didn’t get much attention, but the International Monetary Fund came out with a blog post this week looking at the “global informal” or “shadow” economy. This is activity that falls outside the regulated economy and tax system, such as street vending or unregistered taxi drivers. The author, IMF senior economist Thomas Alexander, points out that this part of the economy is hard to measure since participants usually operate on a small scale. Nevertheless, Alexander concludes that the informal economy has steadily shrunk as a percentage of gross domestic product in every part of the world since the early 1990s. In the OECD countries, it’s down to about 15% from 20% almost 30 years ago. The glass-half-full take is that this means the global economy is structurally better, given that the informal economy is generally associated with low productivity, poverty, high unemployment and slower growth. The downside is that it provides opportunities to those who might not otherwise find employment. So, fewer opportunities in this part of the economy may make it harder for many to escape poverty.TEA LEAVESThe Labor Department is expected Friday to say the U.S. economy added 85,000 jobs in October, down from 136,000 in September, according to the median estimate of economists surveyed by Bloomberg. The reality, though, is that the actual results have just as much chance as exceeding the median estimate as falling below. The top-ranked interest-rate strategists at BMO Capital Markets pointed out in a research note Thursday that five proxies they use to track the health of the labor market are positive, while five are negative. As they explain, the Fed’s third rate cut since July on Wednesday wasn’t meant “to offset weakness in the labor market but rather to get ahead of any cracks that may appear in coming months. As such, we expect Friday’s payrolls report to confirm that a stable job market continued through October, even if the trade war is beginning to impede hiring across sectors.” But if the labor market continues to slow, it would put pressure on the Fed to cut rates again in December, despite Powell signaling that policy makers are unlikely to do so.DON’T MISS A Bright Spot for the U.S. Economy? This Is It: Robert Burgess Futures Are Pulling Cryptos Out of the Dark: Aaron Brown Powell Will Need a Horror Show to Cut Again: Authers' Newsletter The Federal Reserve Puts Monetary Policy on Pause: Editorial Lagarde’s Task Is to Lead a Cultural Revolution: EditorialTo contact the author of this story: Robert Burgess at email@example.comTo contact the editor responsible for this story: Beth Williams at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Halloween’s around the corner, with investors treated to fresh all-time highs in U.S. stocks and nary a trick in sight. But as any scary movie aficionado will tell you, the most formidable frights begin when you’re the most complacent.This year’s compilation of Wall Street’s chilling charts highlights concern about a debt-laden Corporate America, eerie developments in volatility markets and the ills in industrial sectors of the economy. Here are the ghoulies that petrify the professionals.Jill Carey Hall, head of U.S. SMID-cap strategy at Bank of America Merrill Lynch:Quality has grown increasingly scarce within small caps: the proportion of non-earners within the Russell 2000 has climbed to nearly 30% -- a level typically only seen during recessions. (One key industry driver: the Biotech IPO boom, where the addition of newer/early-stage Biotech companies has increasingly driven up the proportion of non-earners. The lack of profitability for many Energy companies has been another big driver). High quality companies tend to outperform in the current phase of the cycle -- when the U.S. is in a soft patch or downturn -- and in periods of elevated volatility.Jon Hill, vice president of U.S. rates strategy at BMO Capital Markets:Going back to the 1970s, CEO confidence hasn’t been this low without the U.S. either about to enter, or already in a recession. If corporate leadership pulls back on investment and/or hiring, that alone could be enough to trip us into contraction. More worrisome is that borrowing costs being too high are notably absent from the cited headwinds -- “Tariffs and trade issues, coupled with expectations of moderating global growth” -- as a result, the impact of incrementally reducing interest rates may be insufficient to stem the cynical tide.Kathryn Koch, co-head of Goldman Sachs Asset Management’s fundamental equity business:According to Climate Action Tracker, current government commitments and projections for carbon reduction fall 30 gigatons short of reaching the Paris agreement targets. In order to potentially reach these targets, we believe the corporate sector will need to provide innovative solutions to the challenges the planet faces today. Those corporates that can provide innovation solutions should benefit from secular growth as the focus on environmental sustainability continues to increase.Maxwell Grinacoff, derivatives and quantitative strategist at Macro Risk Advisors:FRAGILE: Handle with Care – Looking at just top-line realized volatility gives a simplified picture of actual market fragility. In statistics, the frequency of unusual moves is measured via kurtosis. In the below chart, we calculate the 1Y kurtosis of S&P 500 daily returns, attempting to measure the frequency of tail moves and quantify the ‘fragility’ of the index by year over the past two decades.We note that S&P 500 fragility has been steadily increasing over the past 5Y and is on pace to meet/possibly surpass last year’s metrics (think drawdowns like February and October-December 2018). Even in the doldrums of 2017, a 40 basis point move dictated a one standard deviation move in the index (based on an average 20-day realized volatility of sub-7%). That said, a 50-100 basis point move in the S&P was considered outsized at the time! Worth noting that 2017 witnessed >0.50% daily returns ~20% of the year.Patrick Hennessy, head trader at IPS Strategic Capital:Taking a look at the bigger picture the trend higher in the S&P 500 remains intact. The primary difference between 2016/2017 and the last two years is the change in trend in realized and implied volatility. All three have trended higher since August of 2017 due to the increasingly volatile behavior of the S&P 500. Historically, it’s more likely to see this dynamic near markets tops than market bottoms.Megan Miller, portfolio manager at Analytic Investors:The market’s “Fear of Fear” is increasing and appears to be in a new regime. CBOE’s VVIX Index provides the industry with a useful measure of volatility of volatility or “fear of fear.” The value represents the implied volatility of near-term VIX options. 2018’s “Volpocalypse” was peak “vol of vol” with the VVIX closing at 180%. What jumps out at me, though, is that the VVIX reached the top quartile in the last five years, with the largest frequency in 2018. However, the top quartile of the original fear gauge, the VIX Index, occurred mostly during the global financial crisis. If you compare the VVIX with VIX, you see almost a mirror image of extremes. The average “vol of vol” of the last five years is higher, yielding a higher VVIX regime than in earlier years. The opposite is true for VIX.We hypothesize increased volatility of volatility indicates market fragility. If that’s the case, then are we in a latent volatility regime on the verge of cracking?Victor Lin, equity trading strategy at Credit Suisse:Despite the S&P 500 being back near record highs, market depth remains extremely shallow. If that wasn’t concerning enough, depth is significantly lower than previous years at similar levels of the VIX, reflecting increased sensitivity to risk. This usually makes it more difficult to trade in size and also potentially leaves the market more susceptible to extreme moves.Ben Emons, managing director of macro strategy at Medley Global Advisors:Mario Draghi’s farewell bid has left the Eurozone near deflation risks. Despite three rounds of quantitative easing, markets price in Europe will have inflation below 1% for the next decade. The U.S. fortunately has higher inflation and the Fed remains confident the inflation target will be met. That said, inflation swap markets see this differently.The premium of the inflation “cap” struck at 2% is just 26 basis points higher than the inflation “floor” struck at 0%. This says, inflation markets see little scope for the U.S. to reach the target, with possible downside risks of deflation. More worrisome is the difference between U.S. inflation caps and floors has moved closer to Europe, which sees only 6 basis points difference between caps and floors. This signals inflation markets expect neither the Fed nor the ECB will be able to fend off the risk of deflation sometime in the next decade.Subadra Rajappa, head of U.S. rates strategy at Societe Generale:Both market-based and survey-based measures of inflation are at or near the lowest level in two decades. Secular trends like globalization and technological efficiencies, the so-called “Amazon effect”, continue to keep a lid inflation. Rate cuts thus far have had little impact on inflation expectations. Conventional monetary policy seem inadequate to address this issue. What can the Fed do to reverse the trend? Lower for longer, inflation averaging, price-level targeting are ideas, will any work?George Pearkes, macro strategist at Bespoke Investment Group:In the most recent weekly data reported by the EIA, the U.S. imported only about 2.2 million barrels of crude per day, net of exports. The rise of shale has meant that fewer U.S. dollars are flowing abroad in exchange for crude. Add on what might happen as electric vehicle deployment ramps up, and the prospects for a net crude trade surplus in the near future mean one major source of dollar liquidity for resource-heavy global markets is drying up.Robert C. King, senior economist at The Jerome Levy Forecasting Center:One cause for worry is falling earnings, which will make already elevated leverage ratios look much worse. The third-quarter earnings season may be an important reality check for investors who have been told all year that a rebound in earnings is just around the corner.Erin Browne, portfolio manager at Pimco:The deterioration in the corporate credit quality year-to-date highlights a vulnerability in markets and is a reason why PIMCO remains defensive on broader corporate credit. Leveraged loans, for example, are one corner of the market showing cracks, with corporate income growth now expected to be negative, marking the first time since 2016, while debt levels are high, particularly among weaker credits. Lower-rated high-yield bonds are showing similar pressures.While historically, leveraged loans have offered recovery rates considerably higher than high yield bonds in default, investor protections for loans are much weaker today than they were at the peak of the last credit cycle in 2007 and loan-only issuance without high yield bond cushion has exploded. For this reason, we expect loan recoveries to be lower than historical averages, but still higher than high yield during the next cycle. In addition, ratings downgrades, slack in demand, continued deterioration amongst the weakest credits, and a preference from buyers for higher quality issues, all make loans, especially the weaker, loan only issues, one of the most vulnerable segments of corporate credit into a late cycle macro environment. I am watching whether the weakness in the distressed B/CCC credits starts impacting higher rated credit issues or adjacent credit markets.David Schawel, chief investment officer at Family Management Corporation:Net leverage for the median stock is at an all time high. If earnings growth continues to slow, we could see even more pressure on corporate balance sheets which have been stretched of late.Alicia Levine, chief strategist at BNY Mellon Investment Management:U.S. high yield spread differential to investment grade is near the tightest level ever, suggesting heightened market complacency that resembles historical pre-crisis bubbles.Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets:One chart that we consider to be a clear negative or overhang for the stock market at the moment is our valuation model. This model was 1.1 standard deviations above its long-term average as of mid-October, well above average and close to the peaks of the current cycle. Each cycle tends to have a different ceiling. The ceiling of the current cycle is a bit above the pre-financial Crisis ceiling, and a bit below the tech bubble ceiling. This model is essentially bumping up against the highs of April/June 2019, August/September 2018, and 4Q17/Jan 2018. It’s also a range historically associated with 12 month forward returns in the S&P 500 in the low single digits.The blue line on the chart summarizes a number of different valuation metrics, both market cap weighted multiples (more representative of the broader market) and median multiples (more representative of the opportunity set of portfolio managers and sell-side analysts). It’s comprised of things like P/E, but also includes things like price to sales, price to book, price to operating cash flow, and EV to EBITDA, so it gives you a sense of how stocks and the broader market look across a variety of valuation multiples.It’s telling us the U.S. equity market is very overvalued right now, and at a level that it’s simply not been able to break through.Conor Sen, portfolio manager at New River InvestmentsWith factor investing being all the rage, people should be wary about what their factor ETF’s hold. Someone owning the iShares momentum factor ETF, MTUM, might think they’re getting exposure to hot growth stocks. But the 1 holding of MTUM right now is Procter & Gamble, which trades at a historically high valuation on an enterprise value to sales basis. In momentum investing, all that matters is price movement. Defensive stocks like Procter & Gamble have attracted interest as investors look for stability in this tumultuous macro environment and with interest rates being so low. Crowding into defensive stocks might not turn out so well for momentum investors if either the global growth environment improves, causing interest rates to rise, or if those defensive stocks end up reporting disappointing earnings.Neil Dutta, head of U.S. economic research at Renaissance Macro Research:The most worrisome chart is the personal saving rate. But not for the growth bulls, for the bears. The saving rate is elevated as it is despite pretty healthy consumption growth in recent quarters. Assuming the negative news flow clears up and consumers draw down their precautionary savings, consumption will surge and the bearish economic prognosticators will have to move onto something else.Joseph LaVorgna, chief economist for the Americas at Natixis:The financial market (stocks and bonds) is at a near record-size relative to the broader economy. The tail now wags the dog, as the Powell Put is alive and well.Peter Tchir, head of macro strategy at Academy Securities:Yes, lots of other things have influenced markets, but it is impossible to argue that in 2019 -- at least four times, between balance sheet adjustments and talk of easing -- the Fed didn’t play a major role not only in propping the market up, but specifically stepping in at almost any sign of weakness. How long can that go on?I expect a neutral position from the Fed this week and that doves will be thoroughly disappointed. Since each dovish action from the Fed seems to have less impact on markets, that is real cause for concern, or, in the spirit of Halloween, it is scary.James Price, director of capital markets products at Richardson GMP:Canadian households’ debt-service ratio hits all-time highs despite very low borrowing rates. In particular, the last three quarters of measurement have continued higher despite rates dropping since the beginning of Q4/2018.This chart suggests that, given low interest rates (sub 2% for most of the last 5 years) that debt service costs have strongly accelerated recently, with the bottom panel showing the portion of that payment going to pay down principal has started to decline…quickly. Historically, the Principal/Interest ratio has a strong negative correlation to yields (-0.90 over 30 years), but that correlation has turned positive over the past two years.This shows exhaustion in Canadians’ ability to take on more debt despite the past year of declining rates.The concern is that small changes in employment rates could have an outsized impact in the ability to make mortgage payments, and lower yields might not help. Since we Canadians do not like to default on our mortgages, pressure on investment properties and other spending first is highly likely.Jay Pelosky, chief investment officer and co-founder of TPW Investment Management:Given the manufacturing slowdown, as evidenced by the ISM under 50, the U.S. economy is very dependent on continued consumer health and spending. The chart below shows real consumer concern about the future vs the current pretty good star of affairs (record low unemployment, decent wage gains, etc). Should those concerns lead to a pullback in 2020 consumer spending the U.S. economy could weaken further regardless of whether the Fed continues to cut rates or not. This would challenge the forecasted 2020 S&P 10% EPS growth and thus the potential for higher U.S. stock prices.Benn Eifert, chief investment officer at QVR Advisors:This is probably boring and repetitive, but I find the below chart scarier than any charts I see from volatility land.Gina Martin Adams, chief equity strategist Bloomberg Intelligence:I’d just put up a picture of Trump’s twitter account, especially something where he is bashing the Fed, or tweeting out a tariff, or a picture of Elizabeth Warren campaigning. It seems the distractions of Washington are Wall Street’s greatest fears this year.(Updates with additional chart.)To contact the reporter on this story: Luke Kawa in New York at email@example.comTo contact the editors responsible for this story: Jeremy Herron at firstname.lastname@example.org, Dave Liedtka, Rita NazarethFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
S&P500; closed Monday at historical highs, adding 0.55% on the day close. Both expected new Fed interest rates cut and possible US-China trade deal served as key drivers of recent market growth impulse. President Trump, in his Twitter, did not manage to avoid this event, attributing these merits to himself.
As we near the end of October 2019, a very interesting price setup is taking place across many of the US market sectors recently. We only have a total of about seven trading days left in October 2019 and the Financial Sector ETF is rolling over with what appears to be an Engulfing Bearish price pattern near price channel highs. Additionally, the tech-heavy NASDAQ (NQ) has been mostly weaker compared to the ES and YM.
We’ve been writing about the broader US stock market for many months – highlighting the Pennant/Flag formations that have continued to set up since early 2018. Sometimes, the keys to really understanding what is transpiring behind the scenes in the US markets is to pay attention to various market segments and to consider applying some “outside the box” thinking.
Thursday, investors can expect the weekly initial jobless claims figures, as well as existing home sales for the month of August.
Outspoken former White House Communications Director Anthony Scaramucci claims the president is 'unhinged' and in 'steady decline.'
Still, we believe the energy sector is setting up another great trade opportunity for skilled technical traders. Watch how this sets up below $46 and watch for deeper price moves below $45. Once the momentum base is set up, the upside price move should be very clean and fairly quick.
Stocks actually spent most of the session under pressure, but a late session rally helped the S&P; 500 and Dow erase those early losses. The late surge was fueled by a recovery in industrial, energy and health care stocks. Higher U.S. Treasury yields helped bank stocks post solid gains.
The US session keyed off with a Trump tweet and yet another defiant message that gave us no indication the respective Xi-Trump camps are anywhere near to forging a deal. But the tweet set a risk-off tone in markets, and this was then given additional tailwind by a shocker of an ISM manufacturing print in the US, but also in Canada.
With the loss of confidence in the outlook for Corporate America, thanks mostly to President Trump's trade war against China, investors may rush to the exits soon.
Mixed results from data releases and corporate earnings have resulted in cautious optimism if you're investing in ETFs, but the waters have muddied.
If you don't own these up-and-coming small companies in your investment portfolio yet, you could be missing out on a big opportunity for market-beating returns.
Last week's announcement of more U.S. tariffs on Chinese goods may have undermined the prospects for small-cap stocks to rebound this year, even after a brief respite from the Federal Reserve's recent interest-rate cut. Just a day after the Fed cut interest rates for the first time in more than a decade, President Donald Trump vowed on Aug. 1 to impose 10% tariffs on an additional $300 billion of Chinese goods beginning on Sept. 1.