All posts by John Heilner

Market Insights 8/19/2019

U.S. equities finished higher, extending a winning streak to two days following a very volatile week, as a recovery in global bond yields, as well as optimism of further stimulus measures out of China and Germany, boosted investor sentiment.

Treasury yields were higher, along with the U.S. dollar amid an empty economic calendar that won’t heat up until later in the week and culminate with Friday’s speech from Fed Chairman Jerome Powell in Jackson Hole, Wyoming.

Crude oil prices were solidly higher, but gold pared a recent rally.

The Markets…

The Dow Jones Industrial Average rose 250 points (1.0%) to 26,136

The S&P 500 Index increased 35 points (1.2%) to 2,924

The Nasdaq Composite advanced 107 points (1.4%) to 8,003

In moderate volume, 766 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil moved $1.33 higher to $56.14 per barrel and wholesale gasoline was unchanged at $1.66 per gallon

The Bloomberg gold spot price lost $18.33 to $1,495.19 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 98.37

Treasury yields recover somewhat ahead of Fed gathering in Jackson Hole

Treasuries were lower, as the yields on the 2-year and the 10-year notes were up 7 basis points (bps) to 1.54% and 1.61%, respectively, while the 30-year bond rate gained 8 bps to 2.08%. Bond yields have recovered somewhat from a sharp drop that has come amid global growth concerns, U.S.-China trade uncertainty, and heightened geopolitical uneasiness, while global central banks are highly expected to deliver further accommodation.

Last week, market volatility continued to ramp up as the recent plunge in bonds rates that saw the yields on the 2-year and 10-year U.S. Treasury notes briefly invert and the 30-year bond rate fall below 2.0% for the first time in history, accompanied deeper dives into negative rates globally—notably in Europe—and amplified global market skittishness.

Europe sees widespread gains, Asia also begins week higher

European equities finished broadly higher, with global bond yields recovering a bit, while the markets seemed to get a boost from reports that Germany is preparing a fiscal stimulus plan to combat slowing economic growth, as well as reforms from China aimed at lowering borrowing costs. U.K. Brexit concerns continued to fester, while a relatively light economic calendar showed headline July Eurozone consumer price inflation came in a bit cooler than expected.

The euro ticked higher versus the U.S. dollar and the British pound lost ground, while bond yields advanced.

Stocks in Asia finished broadly higher to kick off the week, following Friday’s rally in the U.S. markets to cap off a wild weekly ride, while sentiment appeared to be underpinned by signs of stability in the global bond markets and reforms announced in China to lower borrowing costs.

Chinese stocks led the way, with those traded in both the mainland and in Hong Kong rallying. The yen continued to trim a recent advance, helping Japanese equities to move higher, while the nation reported a smaller-than-expected fall in July exports. Australian securities gained ground and South Korean listings rose, while markets in India ticked slightly higher.

Random Thoughts

Last week’s short-lived inversion of the 2-year and 10-year Treasury yield curve reminded investors that while the start of another recession is assured, its timing is not.

Indeed, the first yield curve inversion preceded all recessions since 1960 by an average of 11 months. What’s more, the rolling six-month price change for the S&P 500 gained an average 3.1% during inverted yield curve periods since 1976 and rose in price 61% of the time.

Plus, Action Economics’ GDP growth projections remain above 2% for the coming seven quarters and confirm S&P Capital IQ’s consensus EPS growth estimates that no earnings recession is on the horizon.

As a result, we project an upward trajectory for equity prices over the coming six-to-12 months. However, we see the same for volatility.

U.S. Market Weekly Summary – Week Ending 08/16/2019

The Standard & Poor’s 500 index fell 1.0% this week, the Dow Jones Industrial Average decreased 1.5% and the Nasdaq Composite declined 0.8% marking the markets third weekly drop in a row as worries about the impact of trade issues between the US and China again weighed on stocks.

The S&P 500 benchmark ended the week at 2,888.68, down from last week’s closing level of 2,918.65. The S&P 500 is now down 3.1% for the month of August and down 4.6% from the record high it reached July 26. However, it is still up 15% for the year to date.

This week’s drop in US stocks came as so many investors sought the safety of long-term US government debt earlier this week that they briefly sent the yield on the 10-year Treasury note below two-year yields for the first time since 2007. This scenario, known as the inverted yield curve, is often viewed as a sign a recession could be looming.

Adding to investors’ recession worries, S&P Global Ratings warned in a Thursday note its US Business Cycle Barometer is pointing to higher probabilities of a recession in the next 12 months than in its last quarterly report.

S&P noted the increased recession risk comes amid trade issues and concerns about the global industrial backdrop, although the firm’s economists also said they see strength in consumer fundamentals helping to assuage the worries.

The energy and financial sectors had the largest percentage drops of the week, down 3.9% and 2.2%, respectively, amid fears about how the sectors would be impacted by an economic slowdown. The materials and consumer-discretionary sectors had the next-largest drops of the week, down 2.0% and 1.9%, respectively.

However, three sectors managed to rise this week: Consumer staples climbed 1.6%, followed by a 0.5% increase in utilities and a 0.3% gain in real estate.

Market Insights 8/15/2019

U.S. equities finished mixed after a volatile session, as continued uncertainty surrounding heightened global recession worries and the steadfast pressure on bond yields.

Treasury yields were lower and the U.S. dollar inched higher, while gold continued to rally and crude oil prices fell.

The Markets…

The Dow Jones Industrial Average rose 100 points (0.4%) to 25,579

The S&P 500 Index gained 7 points (0.3%) to 2,848

The Nasdaq Composite lost 7 points (0.1%) to 7,763

In moderate volume, 876 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.76 to $54.47 per barrel and wholesale gasoline was down $0.04 at $1.64 per gallon

The Bloomberg gold spot price advanced $6.20 to $1,522.56 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.1% to 98.10

Dow member Walmart Inc. (WMT $113) reported Q2 earnings-per-share (EPS) of $1.26, or $1.27 ex-items, versus the $1.22 FactSet estimate, as revenues increased 1.8% year-over-year (y/y) to $130.4 billion, compared to the projected $130.1 billion. The company’s U.S. Q2 same-store sales rose 2.8% y/y, above the forecasted 2.4% increase. WMT raised its full-year EPS guidance and said it expects U.S. same-store sales growth to be toward the upper end of its prior outlook, noting that customers are responding to improvements it is making and that it is gaining market share. Shares were nicely higher.

Strong retail sales, Q2 productivity and regional manufacturing data headlining heavy docket

Advance retail sales for July rose 0.7% month-over-month, versus the Bloomberg forecast of a 0.3% increase, and June’s 0.4% rise was revised to a 0.3% gain. Last month’s sales ex-autos moved 1.0% higher m/m, compared to expectations of a 0.4% gain and June’s revised 0.3% increase. Sales ex-autos and gas gained 0.9%, compared to estimates of a 0.5% rise, and June’s negatively-adjusted 0.6% increase. The control group, a figure used to calculate GDP, rose 1.0%, versus projections of a 0.4% rise, and compared to June’s unrevised 0.7% increase. Sales at clothing and electronics & appliance stores, along with at food service and drinking places all posted solid gains. However, strong sales from non-store retailers—which includes online activity—contributed the most to the fifth-straight monthly gain in retail sales, likely aided by Amazon’s 48-hour Prime Day event.

Preliminary Q2 non-farm productivity grew 2.3% on an annualized basis, versus expectations of a 1.4% gain, and following the upwardly-revised 3.5% increase seen in Q1. Unit labor costs increased 2.4%, versus the forecast calling for a 2.0% gain. Unit labor costs were revised sharply upward to an increase of 5.5% in Q1.

Weekly initial jobless claims rose by 9,000 to 220,000, versus estimates of 212,000, with the prior week’s figure being revised higher by 2,000 to 211,000. The four-week moving average increased by 1,000 to 213,750, while continuing claims advanced 39,000 to 1,726,000, north of estimates of 1,685,000.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment in August improved to 66 from July’s unrevised 65 level, where it was expected to remain, with a level of 50 separating good and poor conditions. This was the seventh-straight month the index has been north of 60. However, the NAHB noted that “Even as builders report a firm demand for single-family homes, they continue to struggle with rising construction costs stemming from excessive regulations, a chronic shortage of workers and a lack of buildable lots.”

Treasuries were higher, as the yield on the 2-year note fell 9 basis points (bps) to 1.49%, the yield on the 10-year note decreased 5 bps to 1.53%, and the 30-year bond rate was down 4 bps to 1.98%. The global markets remain skittish as recent mixed data is exacerbating global growth uncertainty and the relentless pressure on bond yields, while briefly inverting the yields on the 2-year and 10-year Treasury notes and taking the 30-year bond rate below 2.0% for the first time in history, fostering recession concerns to ramp up.

The stock markets were choppy in today’s session, with the upbeat earnings report from Walmart underpinning sentiment and mixed headlines regarding U.S.-China trade tensions in focus. After China threatened overnight retaliatory measures to the next round of tariffs set to kick in September 1st, the markets appeared to find some relief amid reports that a Chinese foreign ministry spokesperson said that the nation hoped the U.S. can meet it halfway on trade—a statement that the nation has said before. Trade concerns cooled earlier in the week as the U.S. delayed certain tariffs to December 15th and exempted certain other tariffs from the increased levies, while suggesting further talks could be in the offing.

Europe trims losses following upbeat U.S. data and trade headlines, Asia mixed

European equities pared early losses but remained in the red, coming off yesterday’s sharp selloff that was fueled by heightened global growth concerns on the heels of disappointing Eurozone and Chinese economic data, which continued to weigh on global bond yields. Stocks recovered a bit on today’s plethora of stronger-than-expected U.S. economic and earnings data and mixed headlines regarding the U.S.-China trade front, which appeared to be keeping escalated trade fears in check.

The euro fell versus the U.S. dollar and the British pound gained solid ground, with a read on U.K. retail sales unexpectedly rising in July. Bond yields in the region finished lower.

Stocks in Asia finished mixed despite the plunge in the U.S. and European markets yesterday that has come from heightened recession concerns, which continues to apply heavy pressure on bond yields, following some disappointing economic data out of China and the Eurozone.

Japanese equities fell, with the yen holding onto yesterday’s jump, and Australian securities dropped sharply on the global growth uneasiness. However, stocks in mainland China and Hong Kong recovered a bit from a recent tumble to finish higher. Volume was lighter than usual with markets in South Korea and India closed for holidays.

Random Thoughts

The inversion of the yield curve measuring the difference between the 10-year yield and the two-year yield led the market sharply lower on Wednesday.

Increased demand for safe haven Treasury bonds was a result of weak economic data from Germany and China.

We would remind investors that while an inverted yield curve has preceded every recession since 1980, not every inversion led to a recession.

Of the seven flat or inverted yield curves over that period, only four resulted in a recession.

Further, since 1968, the average return for the S&P 500 from inversion to recession has been +2.8%. When looking at the performance outcomes in those instances, the range is wide with the index advancing 16.5% in 2000/2001 but declining 14.6% in 2006/2007.

China sharply curbs gold imports

China has severely restricted imports of gold since May, a move that could be aimed at curbing outflows of dollars and bolstering the yuan as economic growth slows, Reuters reports.

China is the world’s biggest importer of gold, bringing in 1.5K metric tons last year – equivalent to one-third of the total global supply – but has cut shipments by 300-500 mt worth $15B-$25B at current prices compared with last year, according to the report.

In May, China imported 71 mt vs. 157 mt in May 2018, while in June – the last month for which data is available – the decline was even sharper, with 57 mt shipped compared with 199 mt in June last year.

China’s likely motive for restricting gold shipments is to help limit the amount of money leaving the country amid a plunge in the value of the yuan.

Market Insights 8/14/2019

U.S. equities tumbled, led by energy and financials and expunging all of yesterday’s rally, as eased trade fears that came after the U.S. delayed some tariffs on Chinese goods were sidelined by global growth concerns following soft data out of China and Europe.

Treasury yields continued to decline, with a brief inversion of the 2-year and 10-year notes exacerbating sentiment.

The U.S. dollar nudged higher and gold continued to rally, while crude oil prices were sharply lower.

The Markets…

The Dow Jones Industrial Average tumbled 801 points (3.1%) to 25,479

The S&P 500 Index declined 86 points (2.7%) to 2,841

The Nasdaq Composite plunged 242 points (3.0%) to 7,774

In heavy volume, 984 million shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.87 to $55.23 per barrel and wholesale gasoline was down $0.06 at $1.68 per gallon

The Bloomberg gold spot price rallied $14.25 to $1,515.76 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.2% to 98.01

Mortgage applications surge, import prices slightly above estimates

The MBA Mortgage Application Index surged 21.7% last week, following the prior week’s 5.3% jump. The sharp increase came as the Refinance Index soared 36.9% and was accompanied by a 1.9% gain for the Purchase Index. The average 30-year mortgage rate fell 8 basis points to 3.93%.

The Import Price Index rose 0.2% month-over-month for July, versus the Bloomberg projection of a 0.1% dip, and following June’s revised 1.1% decrease. Compared to last year, prices were down 1.8%, versus forecasts to match June’s unrevised 2.0% fall.

Treasuries again rallied, as the yields on the 2-year and the 10-year notes declined 9 bps to 1.58% and 1.59%, respectively, and the 30-year bond rate dropped 10 bps to 2.03%. The global markets remained skittish as data is exacerbating global growth concerns and caused a brief inversion of a key part of the Treasury yield curve—the 2-year and 10-year note spread—despite yesterday’s decision by the U.S. to delay and exempt certain tariffs on Chinese goods. Political uncertainty in Europe and Hong Kong continued to fester and Fed rate cut expectations that further reductions were likely this year remained elevated.

Tomorrow’s economic calendar will be very robust, with most reports coming before the domestic markets open. Weekly initial jobless claims will get the ball rolling, forecasted to increase by 3,000 to 212,000, as well as preliminary Q2 non-farm productivity and unit labor costs, with respective quarter-over-quarter increases of 1.4% and 1.8% expected, while retail sales are also on tap, with economists projecting a 0.3% m/m increase for July, while sales ex-autos and ex-autos and gas are both anticipated to post 0.4% m/m gains.

Europe broadly lower amid growth concerns, Asia higher on eased trade tensions

European equities finished solidly lower, as data in the region and in China caused global growth concerns to flare back up, resulting in further pressure on bond yields and exacerbating the inversion of the yield curve in the U.S. The growth uneasiness countered yesterday’s announcement out of the U.S. of delayed and exempted tariffs on Chinese goods that appeared to cool elevated trade concerns.

Eurozone Q2 GDP growth decelerated to a 1.1% y/y pace, from 1.2% in Q1, while Germany’s GDP contracted quarter-over-quarter. The euro dipped versus the U.S. dollar, and the British pound ticked slightly higher, while bond yields in the region came under pressure.

Stocks in Asia finished higher with U.S.-China trade fears easing a bit after the former announced a delay of certain tariffs from September 1st to December 15th, while exempting certain tariffs, including cell phones, footwear and clothing. The announcement from the U.S. appeared to overshadow continued political unrest in Hong Kong that has disrupted travel at the nation’s airport and some July Chinese economic data that showed industrial production, retail sales and fixed asset investment all came in below expectations.

Stocks in mainland China and Hong Kong rose, and Japanese equities advanced, with the yen falling noticeably yesterday and data showing the nation’s core machine orders—a gauge of capital spending—unexpectedly surged in June.

Market Insights 8/13/2019

U.S. equities bounced off their early lows that came from global growth concerns, political uneasiness, and escalated U.S.-China trade tensions, to finish solidly higher.

The reversal came as the U.S. Trade Representative announced the removal of certain tariffs on Chinese goods that were expected on September 1st and the delay of certain tariffs to December 15th.

Treasury yields, the U.S. dollar and crude oil prices were higher following the news, while gold pared a recent rally to six-year highs.

The Markets…

The Dow Jones Industrial Average jumped 382 points (1.5%) to 26,280

The S&P 500 Index increased 43 points (1.5%) to 2,926

The Nasdaq Composite advanced 153 points (2.0%) to 8,016

In moderate volume, 856 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil rallied $2.17 to $57.10 per barrel and wholesale gasoline was up $0.07 at $1.74 per gallon

The Bloomberg gold spot price fell $7.93 to $1,503.23 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—added 0.5% to 97.81

Consumer price inflation slightly hotter than expected, small business optimism ticks higher

The Consumer Price Index (CPI) rose 0.3% month-over-month in July, matching the Bloomberg estimate, and above June’s unrevised 0.1% increase. The core rate, which strips out food and energy, was 0.3% higher m/m, versus expectations of a 0.2% increase and in line with June’s unadjusted rise. Y/Y, prices were 1.8% higher for the headline rate, topping forecasts of a 1.7% increase, and north of June’s unadjusted 1.6% rise. The core rate was up 2.2% y/y, above projections calling for it to match June’s unadjusted 2.1% gain.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for July ticked higher to 104.7 from June’s unrevised 103.3 level, and versus expectations of an increase to 104.0.

Treasuries finished lower, as the yield on the 2-year note jumped 10 basis points (bps) to 1.67%, the yield on the 10-year note gained 5 bps to 1.68%, and the 30-year bond rate moved 2 bps higher to 2.15%. The global markets continued to be skittish on global growth concerns, escalating unrest in Hong Kong, Italian political and U.K. Brexit uncertainty, as well as the recent Fed rate cut and elevated expectations that further reductions were likely this year.

The July inflation picture will round out tomorrow with the release of the Import Price Index, expected to have declined 0.1% m/m following the 0.9% fall registered in June, while MBA Mortgage Applications will also be released.

Europe reverses higher as trade concerns cool on USTR announcement, Asia lower

European equities turned to the upside and finished higher, overcoming early losses that stemmed from continued global market uneasiness toward global growth concerns and the coinciding drop in bond yields, political uneasiness in Italy, the U.K. and Hong Kong, as well as expectations of further global monetary policy accommodation. The upside reversal came as the U.S. Trade Representative announced that certain Chinese products will be removed from the tariff list and certain products will be delayed from September 1st to December 15th.

U.S.-China trade concerns eased on reports that U.S. and China held a phone conversation and plan to hold another round of phone discussions within the next two weeks. The euro and British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. The economic calendar was mixed, with German investor confidence falling much more than expected for August, though U.K. employment data for June showed wage gains accelerated and the job growth was higher than projected.

Stocks in Asia finished lower, with the global markets continuing to be hampered by U.S.-China trade uncertainty, political uneasiness in Europe, global growth concerns and the escalating unrest in Hong Kong with the airport cancelling all departing flights for a second-straight day.

Chinese equities declined and those traded in Hong Kong were sharply lower, with economic data released late-yesterday showing aggregate financing—a measure of total credit issued—and new yuan loans for July both decisively missing expectations.

Stocks in Japan dropped in a return to action following yesterday’s holiday break, with the yen choppy after Monday’s gains, South Korean and Australian listings traded lower, while Indian securities tumbled after being closed yesterday for a holiday.

Some Thoughts on the Pullback

From the all-time high on July 26, until the recent closing low August 5, the S&P 500 slipped into its second pullback (decline of 5.0%-9.9%) of 2019 on an escalation of trade tensions between China and the U.S.

This decline dragged all S&P 1500 cap-sizes lower, as well as its 11 sectors.

This retreat was fairly swift by historical standards, as it took only 10 calendar days to go from its peak to the -5% threshold, as compared with the average of 27 days required by the prior 57 bull-market pullbacks since WWII.

After bottoming, the pullbacks that fell the fastest also took the fewest days (27) to get back to breakeven, while the middle 1/3rd took 46 days to recover and the slowest 1/3rd required 65 days.

Therefore, should history repeat, and there’s no guarantee it will, if this decline remains in the 5%-9.9% range, we may see a final low within the week and a new high by the middle of next month.

The third quarter of 2019 is living up to its reputation as the period that has delivered not only the weakest average price increase since WWII, but also the lowest frequency of gains.

What’s more, Q3’s highest return in the past 73 years was the smallest quarterly high-water mark, while its deepest quarterly decline was worse than that for all others.

Finally, this typical Q3 underperformance was accompanied by the highest level of volatility, as its standard deviation of returns was more than 200 basis points above that of the next most volatile month.

So while this pullback looks as if it may soon run its course and that new highs might just be around the corner, this market may end up negotiating this curve on two wheels!

U.S. Market Weekly Summary – Week Ending 08/09/2019

S&P 500 Posts 0.5% Weekly Loss Amid Continued Trade, Currency Concerns; Energy, Financials Lead Drop

The Standard & Poor’s 500 index fell 0.5% this week as investors continued to fret about friction between the US and China over trade and currencies.

The market benchmark ended the week at 2,918.65, down from last week’s closing level of 2932.05. This caps a rollercoaster of a week for US stocks amid concerns about the trade dispute and how that might be rippling over into the currency market, where Beijing has let the yuan weaken following US threats of more tariffs on Chinese goods.

Friday, investors grew more concerned as US President Donald Trump said, “we will see whether or not China keeps our meeting in September.”

The S&P 500 is now down 2.1% for the month of August. However, it is still up 16% for the year to date.

The energy sector had the largest percentage drop of the week, down 2.2%, as crude-oil futures fell for the third week out of the past four weeks. This came as the International Energy Agency downgraded its forecast for global oil demand growth for the third time in four months, expressing increasing concern over the impact of the trade battle between the US and China on economic and oil demand growth.

The financial sector had the next-largest percentage drop of the week, down 1.7%. Its decliners included E*TRADE Financial (ETFC), which fell 8.4% on the week. Deutsche Bank downgraded its investment rating on the financial-services company’s stock to hold from buy while lowering its price target on the shares to $45 each from $52.

Meanwhile, the upside was led by the real-estate sector, up 1.8%, followed by utilities, up 1.0%. The real-estate sector’s gainers included Equinix (EQIX), which rose 5.4% as RBC Capital Markets raised its price target on the data-center company’s stock to $563 from $520, citing ” roll-forward flow-through impacts” from the company’s Q2 results reported in late July.

Among utilities stocks, shares of WEC Energy Group (WEC) added 3.8% this week as the company reported Q2 earnings per share above the Street view despite weaker-than-expected revenue. The company also increased its earnings guidance for 2019.