Here’s your financial markets weekly report for March 23, 2018.
Stocks careened higher last week. Given excellent corporate earnings and the bounce off the correction lows, the action was as contrived as tears during an Academy Awards acceptance speech. Although people still watch the stock market.
From a valuation perspective, stocks offer bargains. Though many so-called investors do not currently seek them. Intimidated, as they were, by February's correction. And as we know, if you lack the Moxy to be greedy when others are fearful? You can hardly call yourself an investor.
Last month, stocks fell 10 percent for the first time in years. All things being equal, that made equities 10 percent cheaper than they were on January 26.
On top of that, President Trump signed tax reform into law in December. Dramatically lowering corporate rates. And ushering in higher 2018 corporate earnings.
Now consider that Bloomberg estimates that the S&P 500 will grow 26.2 percent over the next 12 months. Equating to massive earnings growth. Much of it thanks to the tax overhaul and continuing deregulation.
Combine these factors? Stocks just hit their least expensive levels in years based on forward P/E ratios.
In other words, valuations dropped by 16 percent these last few weeks. Making them cheaper today than they've been in a year. And while a forward P/E of 17 isn't dirt cheap, it's better than it's been in a while. In fact, you've got to return to 2015 to find levels this cheap. Nor should we forget that the S&P 500's P/E ratio rocketed above 30.
We realize pullbacks like that of early February can be frightening. We must remember, however, that such moves are a required dynamic within a healthy market. Offering investors the opportunity to get in at 2015 valuations. And equating to good things for stocks moving forward. Because no climber, be it of the market or the mountain variety, can simply go straight up. There must be rests. Pauses. And refueling stages that set the tone for the next push higher.
And we've uncovered more empirical evidence as to why this bull can move higher.
Following last month's melee, traders and investors lost faith in tech stocks. That, according to the Commitment of Traders (COT) report. The COT report is a "real money" indicator. It reveals what futures traders are doing with actual investment dollars. Moreover, it's a fantastic contrarian tool. Because when futures traders are all making their bets in one direction, the opposite tends to occur. And as contrarians, we usually want to bet against the crowd.
Currently, the crowd is more bearish on tech stocks than it has been in two years. Rendering several our portfolio positions even more attractive. Because tech stocks often represent the highest-flying facet of the market during the final stages of a bull market. A stage sometimes referred to as, "the melt up." One that involves stocks literally melting higher through that capitulation phase (everyone's in!) until they've reached that final last-gasp apex. When stocks begin to correct to lower lows.
This bears observation. And tells us that this market still has room to maneuver higher. And current market sentiment underscores that outlook.
In January, the tally of bullish investors in the weekly American Association of Individual Investors (AAII) survey surged to a seven-year high. Upon the February correction, the percentage of bears rose. Though not to any extreme. Now, both sides appear confused. The latest survey of individual investors revealed a low percentage of bulls and bears. Neutral investors were the largest group, comprising 46 percent of all responses. One of the highest readings in 15 years.
According to sentiment expert Jason Goepfert, in the 32 years of the survey's history, there have been 56 other weeks when neutral responses were this high during a bull market. Appraise those periods when bears actually outnumbered bulls, as they do now, and you find that the S&P 500's results in the following weeks and months were well above average. Especially over the next one to six months.
Goepfert's conclusion? "Seems like the uncertainty and lack of optimism among these individual investors are at an extreme enough level that it should be a good sign for stocks here."
As the commercial says, you're either running with Sasquatch, or running from Sasquatch. Either way, you're running.
One more notable market observation: after an 18-year walk through the wilderness, chip bellwether Intel finally eclipsed its 2000 high. Climbing above $50.71 last week. With nothing but blue skies and smooth seas ahead. Typically, when a position harnesses the energy required to take out a previous high, there is the potential to move markedly higher. Making Intel worth a watch in the weeks ahead.
Economically, year-over-year core inflation was unchanged this month at 1.8 percent. Though it will jump in March. Probably to 2.1 percent, on the anniversary of last year's one-time plunge in cellphone service plan prices. Further, core CPI inflation will likely rise to about 2.5 percent by the summer -- a rate last seen in 2008. Right before the crash. Not a disaster, but the Fed will be wary of adverse feedback loops in inflation expectations and wage demands. Which likely leads to four rate hikes this year.
More good economic tidings came in the form of February's NFIB small business report, which gauges activity and optimism among the nation's small and mid-sized firms. The index hit 107.6, an all-time high. Underscoring the fact that the U.S. economy is humming.
In D.C., the Trump administration enacted tariffs on steel and aluminum last week. Handing a victory to Peter Navarro's protectionist wing of the administration. And leading to the resignation of Gary Cohn, director of the National Economic Council.
At the DOD, Mike Griffin became the defense undersecretary for research and engineering two weeks ago. At an industry conference this week, he showed defense executives, reporters and DOD personnel why General Mike Mattis isn't the only one at the DOD that means business.
Griffin explained that China is eating the U.S. military's lunch when it comes to developing new weapons.
"The Chinese love our acquisition system... because we are taking... 16 and a half years from stating a need to IOC," or initial operational capability, he said. "They're doing it in two or three. We used to do it in two or three."
Griffin's "highest technical priority" is hypersonics. His goal: respond "both offensively and defensively" to Russian and Chinese advances in the field. "We certainly know how to build hypersonic systems, but we need to get on with it," he said. "When the Chinese can deploy tactical or regional hypersonic systems, they hold at risk our carrier battle groups. They hold our entire surface fleet at risk. They hold at risk our forward-deployed land-based forces."
Finally, Amazon is at it again. This time, attempting to disrupt the retail banking industry.
Nor is this the first time that analysts have wondered about Amazon's banking ambitions. Financial services, or at least some customer-facing products, represent a logical fit. As Amazon has already taken control of many household purchasing habits. So, an integration of banking service would align perfectly.
In 2017, global consulting behemoth McKinsey & Co. began telling financial services clients that they should worry about Amazon. Noting that the Seattle retailer already had a substantial bank-like operation, and an army of Washington lobbyists.
Soon thereafter, Bloomberg reported Amazon extended $3 billion worth of bridge loans to 20,000 merchants operating on its e-commerce platform. Amazon's merchant program is among the least understood aspects of its business. Jeff Bezos, the CEO and founder, has noted that more than 100,000 Amazon merchants have revenues in excess of $100,000. It is a cottage industry hiding in plain sight. And Bezos and his managers are fostering its growth with loans. Don't be surprised to see Amazon involve itself in all sorts of FINTECH, merchant banking and other customer-facing financial services. Hell, at this rate, we're all going to be buying most of what we need through Amazon. Stands to reason that they'd be willing to provide a line of credit, or anything else required to make such purchases.
It's Amazon's world. We're just living in it.
Stay tuned for your next financial markets weekly update…
Financial Markets Weekly Recap
Major indices finished higher last week. The DJIA gained 3.25%. The S&P 500 rose 3.54%. The Nasdaq climbed 4.17%. While small cap stocks gained 4.17%. 10-year Treasury bond yields rose 3 basis points to 2.90%. Gold closed at $1,323.30, up $0.55 per ounce or 0.04%.