December 4, 2018

Stocks fell at the open, giving up yesterday’s post-G20 meeting rally. The Dow is currently down 587 pts and the SPX is down 2.3%. A number of sectors are down more than 2% in early trading: consumer discretionary, financials, industrials, tech, materials. Only utilities are catching a bid. This is clearly a risk-off trade. Foreign markets closed mostly lower last night and early this morning. The VIX Index is back up to 19., but it should be higher if traders were really frightened. Today’s selloff is mostly due to program trading (i.e. “the machines”). The dollar is flat and commodities are trading higher. WTI crude oil, which was crushed in October & November, is edging back up toward $53/barrel. Bonds are faring well today as yields tick lower. In fact, over the last few days, Treasury bond prices have skyrocketed. And remember, bond prices run inverse to yields. So the 10-year Treasury yield is all the way back down to 2.92% for the first time in 2 ½ months. And all of the sudden, investors are again concerned about the yield curve. The difference between the 10-year and 2-year Treasury yields is down to just 10 basis points, or .10%. At the same time, junk bond prices continue to glide lower. The SPDR High Yield Bond ETF (JNK) is now off 6.4% from its January peak. So we’re seeing a risk-off trade in the bond market today as well.

Investors are wondering if President Trump’s triumphant Tweets over the weekend regarding a potential trade deal with the Chinese gave an accurate picture of what really happened. A JP Morgan research note today says, “White house officials are contorting themselves into pretzels” trying to avoid admitting that the president’s statements were “grossly exaggerated.” The Chinese, for their part, remain silent.

A Wall Street Journal article this morning cast doubt on last week’s dovish speech by Federal Reserve Chairman Powell. Remember, those comments sparked a mini stock rally. Most investors—including our team—took his comments to mean a shift away from an aggressive monetary tightening track due to slowing economic growth and higher geopolitical risk (that is, trade war). In that speech, Mr. Powell seemed to clearly reverse his position and implied that the Fed may have to pause its interest rate hikes. The Journal, however, wonders if maybe Mr. Powell didn’t really mean to sound so dovish. After all, he didn’t actually downshift his economic outlook, and he hasn’t explicitly said how many more rate hikes are necessary before short-term rates get back to the Fed’s “neutral” target. The Journal posits Mr. Powell isn’t more dovish, but rather is “less certain about the path ahead.” Exactly; less certainty about the future will likely cause the Fed to pause.

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