Last week saw the S&P 500 rise 1.6 percent as stocks elevated on four of last week's five trading days. Year to date, the index has grown by 3.09 percent. And ended the week only 3.27 percent below January's record high.
Nine years into the economic recovery, there seems to be no trick of which the stock market is not capable. Nor will any record highs be safe so long as this current market momentum persists.
February's 10.02 percent decline frightened many within the investor class. Helping to separate the wheat from the chafe as it brought many non-convicted investors to question their market optimism. Which led to a big percentage of lily-livered cash positions by mid-February. As recent market entrants - many of whom had only recently delved back into the deep side of the equities pool - once again found themselves quivering like wet Chihuahuas in the face of soaring volatility.
Of course, your humble correspondents predicted back in December that 2018 would find volatility charging like the light brigade.
"When can their glory fade? O the wild charge they made! All the world wondered. Honour the charge they made! Honour the Light Brigade, Noble six hundred!"
Only, this would be the Noble five hundred. Those being the 500 stocks comprising the S&P 500 index. Which had crept steadily up the steps last year while making nary a peep. Like a teenager sneaking back to his room after a post-midnight saunter. Tip-toeing up the steps. Trying to emit no sounds that might wake slumbering parents.
Stocks would not, we forecast, go another year with so little sound and fury. Especially with 2018 hosting a mid-term election. Volatility would certainly return from her sabbatical. And she has. Dragging markets down over one volatility-strewn week in early February. Yet, she served a higher purpose. As forward-looking price-to-earnings ratios were chiseled from a lofty 18 times earnings down to 16.2 times. A skosh above the 25-year average of 16.1. And setting stocks up for a summit attempt of higher peaks yet unattained.
As I write this, the S&P 500 sits at 2,781. 3.16 percent beneath January's all-time high of 2,872. The weather report for the index's upcoming summit siege looks clear. As inflation remains in check. Earnings growth remains strong. Corporate stock buybacks continue. And GDP growth appears to be heading higher.
While the Caterwauling Punditocracy continues to frighten The Herd via allusions to "The Next Shoe to Drop," that only establishes further opportunities for cool-headed investors. Because even as volatility picks up, the Good Ship Marketplace simply has too much wind in its sails. As ten years of pent-up, uncorked American economic might look determined to push her to brighter, more fruitful horizons. And we certainly will be along for the ride.
Elsewhere, The Wall Street Journal reported that the emergence of the gig economy in the past decade has scarcely changed the U.S. labor market. All those Uber drivers, contractors and temp workers added up to a scant 6.9 percent of last year's labor force. Down from 7.4 percent in 2005. More than 90 percent of Americans appeared on the payroll of the firm for which they performed. Which throws some cold water on those hyping the explosion of freelancing and the rapidly changing nature of work. Doesn't mean it won't happen. But when everyone predicts that it's predestined, then it's time to pause and take an objective look.
President Trump roiled the pond in which the Group of Seven industrialized countries have been swimming last weekend. Essentially demanding that the U.S. be given a level playing field when it comes to global trade and commerce.
Trump's proposed tariffs are highly unpopular with other world leaders such as Merkel, Trudeau, and to some extent China. Yet, this situation is analogous to what Trump has done in D.C. these last 15 months. Acting as the great disruptor of government/trade and prior methods of diplomacy, governing etc. Amusingly, Trump is held in such disrepute by the media. Even while most other types of disruptors, especially in business, tend to become the next big thing. Leaving us to ask, what if Trump's ideas on tariffs and trade are the next big thing?
Every large system needs a bit of Schumpeter's creative destruction from time to time. And neither NAFTA nor WTO have seen any real reformation since their inceptions. This has been particularly true of NAFTA. While in the WTO's case, the game changer was China's acceptance into the global trading system.
In terms of global trade, the U.S. has become the global Mega-Mart. Having become rich by perfecting its internal processes and the efficiency by which it competes. The global community was all too happy to benefit by the balance and opportunity offered by the U.S. Mega-Mart. But, eventually, the Mega-Mart's vendors, partners and customers began shoplifting. Skimming off the top. Or shorting Mega-Mart on their deliveries. Trump was simply the first Mega-Mart president to call out such inconsistencies.
He isn't seeking to blow up the existing system. But to attain better trade terms for the U.S. Which has been running a huge trade deficit for decades. The system will inevitably experience some stress as Trump's requests will damage the German and Canadian economies. Even as it conversely provided unequal benefits all these years. So, they may respond with retaliatory tariffs. A no-win deal.
President Trump has proven himself as a disruptor. Unlike any past president. Intolerant of an unfair, lopsided system. Accordingly, he will fight to win. Leaving those world leaders negotiating with him in shock. For the first time in a long time, Europe contends with an American president that will stand and fight against unfair trade practices, regardless of how institutionalized they may be.
Domestically, American household wealth recently surpassed the $100 trillion mark for the first time. Largely on the wings of rising home and stock prices. Household net worth-the value of all assets such as stocks and real estate minus liabilities like mortgage and credit-card debt-rose by 1 percent from the previous quarter.
Emerging market investors, beware.
Emerging market equities appear on the verge of a volatile phase. As the traditional funding avenues upon which those markets rely may contract dramatically in the near term. And investors betting big on emerging market stocks should take notice.
As the U.S. budget deficit appears poised for a rapid rise, the consequence will be a surge in Treasury bond issuance. The result of which will be to suck up a large percentage of investor dollars. Investor dollars that might otherwise have been allocated to emerging markets. Moreover, the Fed will likely be forced to stop shrinking its balance sheet. Which will only exacerbate the problem for emerging markets. Denying them the capital inflows they'd have received otherwise. And ushering in a period of volatility just as those markets had appeared to stabilize.
Staying with geopolitics, Tuesday's long-awaited and highly controversial US-North Korea summit between President Trump and North Korea leader Kim Jong Un went well. The multi-hour summit resulted in a vague commitment from North Korea to denuclearize. In exchange, the U.S. pledged vague security guarantees.
Fact is, North Korea fired 17 ICBMs last year. Some of which crossed the Japanese land mass. In 2018, they have fired zero missiles - an incredibly positive step. Throughout history, dictators have best been contended with via positions of strength. Kennedy and Khrushchev. Reagan and Gorbachev. Bush and Hussein. Obama and Qaddafi. Perhaps Trump's unorthodox means of dealing with Kim Jong Un will turn out to be the means required. History will tell the tale. But for now, an isolated, dangerous dictator has been brought forth from his shell. And an incredibly contentious situation has been defused.
Finally, the Men's World Cup began today. And home-team Russia, ranked by soccer analysts as the worst team in the entire field, managed to beat Saudi Arabia, 5-0. Of course, Russia had already miraculously found itself in the most noncompetitive team grouping. Surrounded as they are by such powerhouses as Egypt, Uruguay and Saudi Arabia. All of which leads one to ask, will the collusion never end?
Major indices finished higher last week. The DJIA gained 2.77%. The S&P 500 rose 1.62%. The Nasdaq climbed 1.21%. While small cap stocks gained 1.49%. 10-year Treasury bond yields rose 4 basis points to 2.943%. Gold closed at $1,298.94, up $5.21 per ounce, or 0.40%.