June 7, 2019 – Stocks bounced back this week. Major indices posted big gains after losing every week in May. The reversal was likely technical, at least in part, as many things were looking pretty oversold at the end of last week.
The Nasdaq had a bad day Monday, even as the other major indices posted gains for the day, on reports that the Department of Justice and the Federal Trade Commission are looking at Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) for possible anti-trust violations.
The rally kicked off in earnest on Tuesday when Federal Reserve Chairman Jerome Powell said in a speech that the central bank is monitoring the trade situation and would “act as appropriate” to help the economy keep growing. Market participants and many pundits alike took this a sign that Powell was “opening the door” to rate cuts. We generally think that taking the Fed at face value and not engaging in too much Kremlinology is the best way to understand the Fed, but in this case, it seems significant that Powell’s comments about trade were roughly two paragraphs at the top of the speech, and the rest of the speech could have been given without the impression that rate cuts were on the table.
The odds of a rate cut had already been rising. Yields on the 10-year Treasuries peaked in November, but really took a dive during the last two weeks of May. Powell’s speech helped to shore up the decline in 10-year yields, suggesting that traders are becoming less worried about recession than they were at the start of the week.
Today’s employment situation report was pretty bleak in most terms, but the market loved it as it gave traders more reasons to believe a rate cut is coming. The addition of 75,000 new jobs in May was well below forecasts, and well below the recent trend. Prior months were also revised downward and wage growth remains flat, suggesting that the slowdown in hiring is not about a lack of workers, but potentially a slowdown in the economy.
It’s possible that hiring is slowing because of uncertainty about trade. As this article is being written, the status of a new 5% tariff on goods imported from Mexico that the president tweeted into policy last week remains unknown. There have been several sets of talks, but as we discussed last week, it is impossible to know what conditions need to be met to forestall the new tariffs.
The best sign that tariffs may not go into effect is that the President’s most recent comments on the matter, in the form of a tweet, don’t mention the flow of refugees through Mexico at all, instead discussing the opportunity to sell more farm goods to Mexico, which is already the second largest export market for U.S. agricultural products after Canada.
One scenario is that the start of tariffs could be delayed as talks are being held. Between that and the speculation about what the Fed will do when it meets on June 18 and 19, we’re probably in for more volatility in the next couple of weeks.
All told this week, the S&P gained 4.41%, the Nadsaq added 3.88%, and the Dow Jones rose 3.88%.
Stocks have run up, and down, and now at least part of the way back up a number of times over the last year, so the potential levels of support and resistance are getting pretty thick. You can refer to the charts in last week’s post to see where they are.
We discussed this in our Members-Only Workshop in May, but the point remains, particularly in light of reporting this week that the president’s tariffs have pretty much wiped out savings from the tax bill for most Americans. The dashed line on this chart shows the date of final passage of the tax law. You can see we’ve set new highs since then, haven’t really made much progress since January of 2018. The big downturn toward the end of last year, and the smaller selloff in May were mostly sparked by trade concerns.
10-Year Bond Yields
This chart is of the 10-year Treasury Yield as tracked by the CBOE. The time and dashed line are the same as in the S&P 500 chart above. You can see that yields rose as investors expected more economic growth after the passage of the tax bill. The peak on the chart roughly coincides with the fall highs on the S&P 500. Yields are at roughly a two-year low now, indicating that investors are not expecting a lot of economic growth, or inflation, any time soon.