In The Know - August 2019

Christopher Chiu |

"Many of life's failures are people who did not realize how close they were to success when they gave up." - Thomas Edison

Market Condition: The current market is in a correction as the S&P 500 and Nasdaq have experienced a cluster of distribution days (negative days on increased volume). The S&P 500 recently failed at the 3000 level and is still looking for support. In a similar fashion the Nasdaq Composite Index fell from all time highs and is searching for a bottom. Both the S&P 500 and Nasdaq are above their respective 200-day moving averages (an average price of the indexes over the last 200 days that often serves as an area of support). Widely held stocks like AMZN, FB, AAPL, GOOGL, NFLX, ADBE and others have also failed at important price levels. On the other hand many lesser known names continue to perform well, indicating there is still demand for certain stocks. As earnings season continues, we will see more price action which may give us clues as to the direction of the market. For now the longer term view is that the bull market continues.

Recent headlines: Tariffs and trade wars came back into the spotlight. In reality this will affect investor sentiment in the short run, but lacks any real teeth at this time to derail the bull market. Once again investors are infatuated with the actions of the Federal Reserve after this week's rate cut. Two things come to mind: 1) don’t fight the Fed, right or wrong, if they are adding more liquidity in the system, stocks will do fine, 2) the Fed does not control the economy, that belongs to the entrepreneurs in the private sector, but government wants you to think that they are saving you from every dip in the market and can control everything for you. The global manufacturing recession is also getting a lot of play in the headlines; these fears should lower expectations going forward and widen the gap between expectations and reality. Once it becomes clear that the reality is much better than the lowered expectations markets will respond favorably.

The economy: Despite what you might hear, a recession in the near term is unlikely. The yield curve has not inverted, and inverted yield curves tend to predate recessions by 7 months at the earliest. High yield spreads remain normal thus the bond market is not signaling any trouble. Real retail sales grew 1.7% and made an all time highs in June. Unemployment claims are at a 50 year low. The job market remains strong average hourly earnings rose 0.3% and are up 3.2% from a year ago. The Conference Board Leading Economic Index (LEI) for the US declined 0.3 percent in June, following no change in May and a 0.1 percent increase in April. This fall in June was the first decline since last December, primarily driven by weakness in new orders for manufacturing and housing permits.

Summary: Usually equity prices fall ahead of recessions, but economic indicators as those listed above fall even sooner. Strength vs. weakness in economic indicators distinguishes a normal correction from an oncoming prolonged bear market. At this point our indicators are not signaling an imminent recession despite what you may hear or read in the financial press.

"I don't set trends. I just find out what they are and exploit them" - Dick Clark