November 21, 2018

Stocks jumped up at the open this morning (Dow +172 pts; SPX +.85%). The SPX is now retesting its 10/29 correction low. I’d much rather see the index fall at the open and then climb into the close. At the moment, energy stocks are up over 2% on higher oil prices. Consumer discretionary, materials, communications, tech, financials, and industrials are all up over 1%. Only utilities and healthcare sectors are in the red. European markets experienced their own relief rally, with most indexes closing up over 1%. WTI crude oil spiked nearly 4% this morning, proving that day-to-day moves in this commodity represent market manipulation by traders more than they represent changes in supply and demand. By the way, oil fell 30% from 10/3 through 11/20. Bonds are trading lower today as yields rise. The 5-year Treasury yield is back up around 2.91% and the 10-year yield is back up to 3.08%.

Business durable goods orders—for equipment intended to last more than three years—fell 4.4% in October from prior month levels. The culprit was a drop in orders for commercial and military aircraft. Excluding those categories, orders were flat with prior month levels. This last figure matters more, because economists view capital goods orders excluding transportation & defense equipment as a more accurate read on the health of US corporate capital spending. On a year-over-year basis, that measure is up 4.8% and just rebounded from a weak September. There’s something for both bulls and bears in this report, so it didn’t give us a clear answer as to whether the trade war with China is hindering capital spending. The fear, of course, is that tariffs will increase the cost of doing business and therefore discourage business leaders from investing to grow their enterprises.

The US Index of Leading Indicators (LEI), which is supposed to predict the direction of the economy over the next six months, slowed in October. LEI has been trending steadily upward since mid-2016, coinciding with a pick-up in consumer spending, business investment, and overall economic growth. In September, the index rose an incredible 7.2% from year-ago levels, marking the fastest rate of improvement in eight years. Last month, however, LEI slowed to a 5.9% rate of growth. That’s still pretty strong, but it’s clear we’ve lost some momentum. This doesn’t really come as a surprise; economists are expecting the economy to slow from its current 3% rate of growth to about 2.5% in 2019. The question is, will additional trade tariffs and more Federal Reserve rate hikes cause the economy to decelerate faster than the expected rate.

Existing home sales rebounded modestly in October, breaking a recent string of monthly declines. Sales of previously owned homes ticked up to an annualized rate of 5.22 million units. The post-housing crisis high for existing home sales was 5.7 million annualized units back in November 2017. Since then, higher mortgage rates & still rising home prices have caused the market to slow down a bit.

Famed bank analyst Dick Bove says the Federal Reserve is tightening monetary policy much too quickly for the economy to handle. He believes the stock market is faltering because the “financial system in the US is undergoing a dramatic shift…from decades of easy money at low- to no- interest rates to a period in which money is not freely available and it costs considerably more.” Of course, we most often associate Fed policy with interest rate hikes, but Mr. Bove points out that the Fed is also shrinking its balance sheet (by 6% this year). That results in a smaller money supply and higher rates as well. He says the idea that the Fed is pushing rates up to a “neutral” level that neither stimulates nor constricts the economy is “silly” and should be abandoned. Mr. Bove’s view is not consensus among Wall Streeters, who generally believe the economy is very strong and if the Fed cannot raise rates now, it never will. But as the stock market softened up over the last six weeks, investors have growth much more critical of the Fed.


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