December 7, 2018

Stocks headed lower again today (Dow -550 pts; SPX -2%). Ten of 11 major market sectors are down, led by tech (-3.1%). Utilities is the only bright spot +.6%). The VIX Index is back up to 24. WTI crude oil shot up toward $52.60/barrel after OPEC agreed to cut back oil production targets. Globally, oil is temporary over-supplied due to geopolitical events and government manipulation. Crude tumbled from roughly $76/barrel to $50/barrel in just 2 ½ months. Bears are taking this as a sign of an economic slowdown.

JP Morgan quantitative analyst Marko Kolanovic says “fake news” is at the root of the stock selloff. The media is to blame. “Positive GDP [growth] and earnings are reality, which is currently starkly disconnected from equity sentiment, valuation, and positioning.” In other words, the fundamental underpinnings of investing are healthy and investors are too negative. “To some extent, we trace the disconnect between negative sentiment and macroeconomic reality to the reinforcing feedback loop of real and fake negative news.” Clearly, we at Lighthouse have noticed a disturbing trend toward negative hyperbole and misleading statements and agree that something untoward is going on here. Mr. Kolanovic cited not just financial analysts but also political groups and even foreign actors as contributing to the problem. And of course he noted massive amounts of capital controlled by trading algorithms that react to headlines, whether true of false.

Federal Reserve Bank of St. Louis President James Bullard suggested today that the Fed may not need to raise interest rates this month. “The current level of the policy is about right,” he said. The Fed’s monthly policy meeting will be held in two weeks, and most market participants expect a rate hike. In fact, the options markets suggests a 77% chance of a rate hike. A subset of the Fed bank presidents vote on each policy decision, and while Mr. Bullard is not currently a voting member, he will be next year.

According to the Bureau of Labor Statistics, the economy generated 155,000 new jobs in November. Economists expected nearly 200,000 so there is a little disappointment. We need about 130,000 on average each month to absorb new entrants into the workforce. The unemployment rate held steady at 3.7%, which is considered extremely low. Average hourly earnings also held steady, rising 3.1% from year-ago levels. I’d characterize the report as decent but not great. Importantly, it will not encourage the Fed to hike rates this month.


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