by Pinchas Cohen
The Week That Was
While stocks in the US gained over the past weeks, they have done so on higher volatility. This past Friday, the VIX reached 14.58 on news that US President Donald Trump's former national security advisor Michael Flynn pleaded guilty to lying to the FBI about his conversations with Russia's ambassador and was now cooperating with Robert Mueller's special council investigating Russian meddling in last year's presidential election. The spike was the VIX's highest since August 21.
Equities jumped on Tuesday and Thursday on the return of optimism the Senate might finally pass a tax bill, but the news about Flynn dampened some of the euphoria as the trading week drew to a close. Nevertheless, the S&P 500 had a strong week. On Thursday, the benchmark index posted its 56th record this year.
Even after Friday's news-driven volatility pushed the SPX lower, it recovered into the close for a weekly gain of 1.52 percent, led by the Consumer Discretionary sector which gained 2.39 percent, while Technology and Real Estate were the two losers, with a 0.47 and 0.51 percent declines, respectively.
Yesterday Trump tweeted:
Critics responded by pointing out this could be seen as a veiled confession by the President, acknowledging Trump knew Flynn lied to investigators before firing him. As such it sheds a different light entirely on Trump's actions—including his alleged attempts to encourage the FBI to drop any investigation into collusion by Flynn. None of this helps Trump; indeed, it's more likely to harm his case. The President may now also face obstruction of justice charges, which some say should end his presidency.
Of course, this provides an additional set of scenarios for ongoing, even growing, political uncertainty which could negatively affect markets. And that's on top of the on-again/off-again North Korean geopolitical risk, which riled markets last week. Add to all that the rotation out of the growth sector and into defensive stocks which has the potential to lead to a broader market correction, a sentiment shift that may cause unexpected changes in fiscal, monetary or trade policies.
As of last week though, no sentiment shifts were in evidence as the Dow Jones Industrial Average had no trouble rocketing past its 24,000 milestone on the back of 256- and 332-point daily gains. This after the index moved, seemingly effortlessly, past the 23,000 level only 32 days earlier.
Indeed, investors propelled the Dow through an astonishing series of milestones this year: 20K, 21K, 22K, 23K and 24K, without what would appear to be sufficient time to recuperate by taking profits, before the index continued its climb. It closed the week up 2.87 percent as the biggest blue chip stocks were the favorite.
In a reversal from the previous week, during which the small-cap Russell 2000 was the biggest gainer, followed by the NASDAQ Composite, with information technology the leading sector, both indices underperformed this past week.
The NASDAQ Composite gained 0.59 percent, thinned out by the rotation out of tech; the Russell 2000 gained 1.4 percent.
Investment firms are advising clients to be underweight stocks going forward and to replace some of those positions with bonds. But with US equity markets gaining nearly 3 percent in the past two weeks, on top of the 8.3 percent advance they've seen since Labor Day, this year's gains and records create an extraordinary conflict for investors. The more impressive the equity market results, they more investors feel they will lose out by remaining on the sidelines.
This becomes more acute when every additional warning, including from this site, is followed by another rally—especially when it's to a new record high. It's no wonder even seasoned investors are finding themselves doubting their cold, calculating statistical knowledge, whether technical or fundamental. Of course, US markets could follow in the footsteps of both Japan's TOPIX and Nikkei 225, each of which has seen strong pullbacks in recent weeks, from 25-year highs.
Nevertheless, for now, news that the Senate was moving forward on its tax reform bill, including additional details on specific provisions and potential support from key GOP policymakers, raised hopes that Congress was getting closer to a final deal. While there is still significant work to be done, including reconciling the differences between the House and Senate bills, markets have responded favorably to the prospects of tax reform legislation coming to fruition in the near term. On the other hand, if this optimism is found to be misplaced, markets can taketh away just as easily as they giveth.
Third-quarter GDP was revised up to 3.3%, the strongest period of growth for the U.S. economy in three years, marking the first back-to-back quarters above 3% since 2014. Particularly encouraging was the move higher in business investment, suggesting healthier economic conditions may be spurring a much-needed rebound in capital expenditures. Then again, should some voices – including bond investors – prove right and growth begins to wane again, markets will likely pull back hard.
The Week Ahead
All times listed are in EST
Monday
12:00: Japan – Consumer Confidence (November): forecast to rise to 45.2 from 44.5.
4:30: UK – Construction PMI (November): expected to rise to 51.1 from 50.8.
20:45: China – Caixin Services PMI (November): expected to fall to 54.1 from 54.6.
Tuesday
4:30: UK – Services PMI (November): forecast to rise to 55.9 from 55.6. These days the politics of Brexit negotiations seem to have additional impact on the pound. Keep an eye out as PM Theresa May meets European Commission President Jean-Claude Juncker and Chief Brexit negotiator Michel Barnier on Monday. The meeting is key to actual trade talks.
The British pound has had five straight weeks of gains. A higher peak than September will register a continued uptrend, since October 2016.
8:30: US – Trade Balance (October): deficit expected to widen to $43.8 billion from $43.5 billion.
10:00: US – ISM Non-Manufacturing PMI (November): forecast to fall to 59.3 from 60.1.
19:30: Australia – GDP (Q3): YoY growth forecast to rise to 3% from 1.8%, while QoQ growth drops back to 0.7% from 0.8%.
Wednesday
8:15: US – ADP Nonfarm Employment Change (November): 190K jobs expected to have been created from 235K a month earlier.
10:00: Canada – BoC Rate Decision: no change in policy expected.
10:30: US – EIA Crude Inventories (w/e 1 December): previous reading was a drawdown of 3.6 million barrels.
The price of crude oil has retreated, forming a bearish hanging man, which with a confirmation of a lower closing price, suggests additional declines.
Thursday
5:00: Eurozone – GDP (Q3, 3rd estimate): QoQ expected to be 0.6% from 0.7%, and YoY 2.5% from 2.3%.
8:30: US – Initial Jobless Claims (w/e 2 December): claims forecast to fall to 236K from 238K.
Gold, the anti-dollar, has reached a triple support: the uptrend line since December 15, the bottom of a trading range since October and the 200 dma. This gives bulls three reasons to go long the yellow metal, and suggests the dollar could fall.
10:00: Canada – Ivey PMI (November): forecast to fall to 57.4 from 63.8.
18:50: Japan – GDP (Q3, final estimate): QoQ expected to be 0.3% from 0.6%, and YoY 1.4% from 2.5%.
Friday
1:32: China – Trade Balance (November): exports expected to rise by 7.2% from 6.9% a month earlier.
A slowdown of China's economic growth, currently the world's biggest commodity consumer as it expands its infrastructure, is what has repeatedly sent commodities into a selloff, dragging stocks down. The steam engine that pulled the US out of the 2008 abyss is feared to have the potential to push it back in there.
The China slow down sent commodities plunging. They remain in an uptrend for now but need to register a peak higher than the week ending November 6 to resume the uptrend.
2:00: Germany – Trade Balance (October): previous reading was a surplus of €24.1 billion.
4:30: UK – Trade Balance, Industrial Production, Manufacturing Production (October): trade deficit to narrow to £2.4 billion from £2.7 billion, while industrial production rises 2.2% YoY from 2.5%, and manufacturing output rises 2.4% from 2.7%.
8:30: US – Nonfarm Payrolls (November): 198K jobs forecast to have been created, from 261K, while the unemployment rate is expected to rise to 4.2% from 4.1%. Average hourly earnings are expected to have increased by 0.2% from flat last month. Keep an eye on average hourly earnings—a key gauge for interest rates—as policy makers want to be assured that consumers will possess the wherewithal to continue to support the economy. Wage growth that failed to match rising prices has been a thorn in the side of US economic growth.
The US dollar ended a 3-week fall, registering a weak invested hammer, for its lower shadow. A higher weekly close would confirm the bullishness of the signal.
10:00: US – Michigan Consumer Sentiment (December, preliminary): expected to rise to 99. from 98.5.