December 6, 2018

Stocks sank at the open despite better than expected economic data. For the first couple of hours, most major market sectors were down more than 3% before bouncing off the lows. This could be the correction’s capitulation flush. While the Dow was down about 770 points, it is now down 436 pts. The SPX is currently down 1.7%. The more defensive sectors (consumer staples, utilities) also dumped at the open but are trying to claw their way back. Foreign markets aren’t serving as a safe haven. European markets closed down more than 3%. Asian markets were down roughly 2% overnight. The dollar is weaker, but that’s not helping commodities, most of which are trading lower. WTI crude oil fell back to $50.60/barrel, but quickly bounced back over $51. Bonds are catching a bid as you might expect. The iShares 20+ Year Treasury Bond ETF (TLT) is up .6%. High-grade corporate bonds, which have lagged lately, are up as well today. Junk bonds continue to struggle. The 2-year and 10-year Treasury yields are down around 2.71% and 2.85%, respectively. The difference between those two yields, 14 basis points, is very small and that’s spooking equity markets. Looking back at the last two months, any volatility in rates has been greeted with fear. The market doesn’t like it when rates rise, and neither does it approve when rates fall. Both are somehow begin viewed as bad news.

Payroll processor ADP says the US economy generated 179,000 net new jobs in November. That’s lower than October’s 225,000 new jobs, and it’s also modestly lower than economists were expecting. Services businesses were responsible for the lion’s share of hiring activity, whereas goods-producing companies added only 16,000 jobs during the month. Bloomberg says that while the pace of hiring slowed, data “do not flash panic signals yet.” Indeed. On the one hand, with the unemployment rate down under 4%, there just aren’t many more people left to hire. The bears will say that recent weakness in housing and auto demand points to a moderating in hiring in the next several months. But I need to stress that last month’s job tally is very much within the range of healthy and normal.

Separately, The Bureau of Labor Statistics says initial filings for unemployment insurance continue to bump along at about 230,000 per week. While that’s a bit higher than we saw back in August and September (about 210,000/week). But make no mistake, filings are still very close to multi-decade lows. This data series is usually seen as a predicter of changes in the economy, and so far it remains very strong.

Private research firm Markit Economics says its US business activity surveys improved in November. Last month, Markit’s Composite Index rose to 54.7 from 54.4. Economists expected no improvement. The surveys follow the same format as the more widely known ISM indicators, which corroborate improvement last month. Recall that with both sets of data, any reading over 50.0 indicates businesses are expanding.

CNBC interviewed Lee Cooperman of Omega Advisors today, and he snarled back at their panic. “The [financial news media] TV creates a lot of craziness,” he said. Mr. Cooperman was asked about his view of the stock market correction, and quickly said he doesn’t see an onrushing economic recession. “We’re not looking at that.” In his view, “all we’ve had is a violent correction of a short-term nature.” In other words, this probably isn’t the onset of a bear market. When pushed on this point, he noted that traders are probably reading too much into this correction. After all, what did the market tell us in October 1987 when it crashed in one day? It certainly didn’t tell us a recession was on the way. Rather, it told us that portfolio insurance didn’t work. He cautioned listeners, “You gotta keep your head about yourself.” Mr. Cooperman attributes the violence of this correction to “technicals” and short-term trading algorithms.

IMF Managing Director Christine Lagarde believes the main issue causing global stock markets to correct is a “question mark about growth prospects going forward. My sense…is that it is a little bit overdone.” He notes that the IMF forecasts global economic growth at 3.7% next year, and that’s very healthy. When asked specifically about the US she said, “I don’t see the elements of a recession” in the near-term.


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