Week In Brief: July 27th

August 1, 2018

The S&P 500 hit a weekly peak on Wednesday's close. Then drifted lower. Closing up 0.6 percent on the week. And reaching its highest point since January. Up 4.56 percent YTD. And back within 2 percent of January's record high.
It was a tough week for many big tech and media stocks. As valuation always matters at some point. But the rest of the market, which remains a lot cheaper than the FAANG stocks, has held steady thus far.
It's been six months since the last S&P 500 high. Marking the third-longest stretch below a new high since 2009. Yet, the all-time high sits only 1.5 percent above the index. So close you can smell it. But bears do not plan to just give anything away. And have been very effective these last six month at holding the line. And thwarting the bulls.

Despite tech's tough week, every U.S. economic sector has remained above the 50-day moving average. A bullish sign.
Q2 earnings strength continued last week. Despite some high-profile tech misses. 70 percent of companies have beaten earnings expectations. While 67 percent have beaten revenue estimates. The earnings beat rate is excellent. Well above the 60 percent average since 1999. Though the revenue beat rate has weakened the past two quarters.
This week's likely market catalysts will be: July's jobs report, the Federal Reserve's policy meeting and another round of earnings reports. All of which will serve to send stocks higher or lower.
I noted in my trading journal on Monday that -- in an unusual move -- Citi and Goldman Sachs have both gone on the record in calling for a major equity market firestorm. Questioning the rational for the recent rise in prices. Noting the decline in tailwinds like easy liquidity and fiscal stimulus. And the gathering storm clouds of prospective trade wars. And, following nine years of market gains, an increasingly pervasive downside bias among investors. Both firms pointed out that gains have become too narrow. Limited only to a few big names. Which historically can lead to big drawdowns should markets get roiled.
Upon waking Tuesday, I was greeted by the smell of Morgan Stanley's own correction call wafting throughout the house.
Not to be outdone, MS went on the record with an even starker warning than Goldman and Citi. Warning of a looming correction. One that will be even deeper than February. That the selloff is imminent, and has "just begun." MS believes we are in the midst of a "rolling bear market." Explaining that investors are unprepared for the big losses in tech, and the market has little to look forward to. Further, the drop will be bigger than February's "if it's centered on Tech, Consumer Discretionary, and small caps, as we expect".
Well, aaaalrighty then!
Having been on the wrong end of the call in 2000 and 2008, these venerable Wall Street institutions desperately wish to be ahead of the next big move. That said, history tells us that these firms -- like the herd of Main Street investors -- tend to get it wrong more often than right. So, while we anticipate volatility heading into the November election, we don't necessarily see a connection between downside risk, and the prognostications of Citi, Goldman and Morgan Stanley. In fact, we view this a bit cynically. As November's contentious midterm election is almost certain to dial up volatility. So calling for a pullback is like predicting heatstroke at a southern music festival in August. Probability render it a safe call.
Still, we adhere to the idea that, if one were to take the opposite side of their speculation, one might be better off. As these firms, filled with airtime-seeking gurus, tend to wind up on the wrong side of history. This isn't meant to be heaven. Where everything is organized for our convenience. This is earth. Filled with imperfection. And man is crooked timber.
Could these gurus have nailed it this time? Doubt it. But only time will tell. One side note: that same day, Goldman also reiterated its buy rating on Twitter. Even after the company missed earnings expectations and reported a decline in users. Leading us to ask: Goldman calls for market tumult based on narrowing tech leadership yet continues to recommend a tech company that just missed earnings amid fewer consumers?
Hey, Goldman: you can either have your cake, or you can eat your cake. Can't do both.
Facebook already saw shares plummet 19 percent last Tuesday. Following an unexpected earnings miss. Shaving $120 billion in market value. And a whole bunch from Mark Zuckerberg's net worth. Compounding matters was continuing chatter over controversial data collection habits. And whether consumers -- and perhaps shareholders -- would not soon lose faith in Facebook. The stock ended Monday at 218. And by 4:02 pm Tuesday, it had fallen to 178.
U.S. Q2 gross domestic product grew at 4.1 percent annualized. That's unlikely to be repeated, though the underlying picture looks impressive. Over the past year, it's up 3.2 percent, a solid proxy for underlying growth.
Can it last? The numbers suggest the expansion has room to run. But sustained growth at that pace requires faster growth in the pool of workers, as well as in their productivity. Macroeconomic Advisers forecast a solid 3.1 percent Q3 growth rate. Well above trend these last ten years.
Consumers have begun to see higher prices for recreational vehicles, soda, beer and other goods. Largely because of recent tariffs on metals and parts. When costs rise, manufacturers choose whether to absorb the expenses or pass them along to customers. In recent days, many companies like Coca-Cola and Polaris Industries, have said they plan to raise prices to recoup a portion of tariff-related costs.
As of today, however, consumer confidence remains near record highs.
In D.C., there remains roughly 100 days to go until midterm elections. Lawmakers headed home for August recess.
Meanwhile, Paul Manafort's trial begins this week. And will have implications far beyond the immediate charges. A conviction would provide special counsel Robert Mueller momentum as he pushes to complete the investigation amid GOP criticism that he is leading a partisan inquiry. An acquittal would provide critics ammunition to push for a quick end to his operation.
On Pennsylvania Avenue, President Trump met this week with Italy's new prime minister, Giuseppe Conte. Who has been in office just 59 days. One easy topic of conversation for the two leaders: How NATO needs to spend more on defense. One difficult topic of conversation: How Italy can't quite afford to spend more on defense.
The new Italian PM "will probably argue that Libya is a mess that Obama created, which will resonate with Trump, that migration is very hard to control as a consequence, and that this migration poses a risk of terrorist attacks against Europe, U.S. interests in Europe, and even the United States," said Erik Jones, professor of European Studies at John Hopkins University.
On the front lines of the trade wars, Mr. Trump agreed with European Commission President Jean-Claude Juncker to a truce to a trade dispute that had erupted after Mr. Trump imposed tariffs on steel and aluminum imports. Europe had retaliated, drawing threats from Mr. Trump to impose even bigger restrictions on imports of European cars. Chief Economic Advisor Larry Kudlow reported over the weekend that the U.S. will "immediately" begin negotiating with the EU to complete a broad, concrete trade deal.
Meanwhile, China's global-trade imbalance appears to be shrinking. Leading Chinese leadership to argue that China no longer pursues a mercantilist policy. Official data is expected to show China's current account, which measures its transactions with the rest of the world, was in deficit for the six months ending in June. Essentially showing it imported more than it exported. A trend which, at least for now, is unlikely to impress President Trump. Focused as he is on the U.S.'s ever-widening trade deficit with China.
Moreover, some economists argue China is hardly rebalancing. As the country's status as the world's factory floor -- meaning it purchases raw materials and components from overseas and then assembles and ships the final products out -- remains little changed.
Trump also threatened to shut down the government if border security is not addressed, tweeting:
"I would be willing to 'shut down' government if the Democrats do not give us the votes for Border Security, which includes the Wall!" Must get rid of Lottery, Catch & Release etc. and finally go to system of Immigration based on MERIT! We need great people coming into our Country!"
While we find value in a merit-based immigration system, we see little in threatening to shut down the government. Nor do his GOP peers. We believe the president wants to bring the behind-the-scenes budget machinations into the public view. And in some respects, he may be right. As full transparency illuminates for the public just how the sausage is made. Yet, we believe too much of these tactics run counter to putting the public at ease. To the public discourse. And to the nation's economic interests.
In the Middle East, U.S. officials see a window of opportunity in Afghanistan. Holding historic peace talks which could end a 17-year war. There are signs of optimism, including a three-day ceasefire last month. Said Gen. Joseph Votel, who heads U.S. Central Command: "There is something to the fact that people are tired and saw something in the cease fire that got them excited."
In the Far East, North Korea returned the purported remains of 55 American troops who served in the Korean War -- exactly 65 years since the conflict's de facto end. The goodwill gesture provides relief to the families of MIA veterans. And serves as a positive mile marker in ongoing discussions over the North's potential denuclearization.
Stay tuned...
Government Watch
The U.S. House of Representatives headed off on vacation last week. Joined by the Senate this week. Just as a variety of critical issues reach a crescendo of required attention yet failed to achieve any closure (i.e. trade, immigration, budget, etc.). Leaving the U.S. legislature with roughly nine work days prior to the November midterm election. Likewise, the British Parliament will soon be joined by Brussel's EU administrators on vacation. Just as Brexit appears increasingly likely to become a fraught situation for both sides.
Therein resides our problem with public sector bureaucrats: their schedule-based lives tend to lack a timely, results-driven orientation. One that often disregards the betterment of constituents. And oft substituting high-minded platitudes for real action.
With neither the attainment of the public's greater good nor the appearance of trouble on the horizon reason enough to prevent American and European politicians and bureaucrats from pre-scheduled, extended vacations.
And these, dear readers, are the very clowns we hope will eventually tackle and solve our rising debt problems? Oh boy...
Weekly Results
Major indices finished mixed last week. The DJIA gained 1.57%. The S&P 500 rose 0.61%. The Nasdaq fell 1.06%. While small cap stocks lost 1.97%. 10-year Treasury bond yields rose 6 basis points to 2.96%. Gold closed at $1,222.93, down $9.07 per ounce, or 0.74%.

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