Over the past 24-hours, global markets were obsessed with the President’s move to renew sanctions on Iran. The oil market swung around. And so did stocks, to a degree.
These are important events. They are news-worthy events. And they carry plenty of shock-value. But, without underplaying the importance, we’ve seen this movie (bold change) a lot over the past 16 months, under the Trump presidency. And despite the risks that many have feared along the way, we’re seeing a better economy, healthier companies and healthier consumers. And we’re seeing the potential for reform in the trade imbalances that led to the financial crisis.
It’s the tough talk, tough positioning and the “credibility to act” that is producing results. And Trump is working from a position of strength, leveraging the biggest economy in the world, and an economy that is leading the global economic recovery. And he continues to tick the boxes on his game plan of change (global and domestic).
But the risks from the bold change has only provided more fodder for those skittish investors that don’t believe in the growth story. That continues to reinforce their views of an ugly outcome in global financial markets. And that continues to keep investors under-exposed to stocks.
However, with the fundamental backdrop strong, and valuations cheap (relative to low interest rate environments), that should keep the cash from the doubters chasing stock prices as they move higher.
Crude oil crossed the $70 mark today, and with new sanctions to be placed on Iran, likely tomorrow, $100 oil is looking very possible.
We’ve talked a lot about oil prices over the past couple of years. In early 2016, we talked about the price crash that was induced by OPEC as an effort to crush the competitive U.S. shale industry.
While they nearly succeeded, these oil producing countries nearly killed their own economies in the process. So, in effort to drive oil prices higher, to salvage oil revenues, they flipped the switch in late 2016, cutting production for the first time since 2008. And they did so, in a market that was already undersupplied.
In my January 12th note, we revisited Leigh Goehring’s call for $100 oil. Goehring is one of the best research-driven commodities investors. And has been calling for triple-digit oil prices–this year! He predicted a surge in global oil demand (which has happened) and a drawdown on supplies (which has been happening at “the fastest rate ever experienced”). He said that with the OPEC production cuts from November 2016, we’re “traveling down the same road” as 2006, which drove oil prices to $147 a barrel by 2008.
Below is the chart of oil. A break of $70 is putting the price of oil very close to the levels that it collapsed from that Thanksgiving Day evening back in 2014. That was when OPEC announced that it opted NOT to cut production, despite an oversupply and plunging prices.
At the end of last week, I said “it looks like the all-clear signal has been given to stocks.”
Well, we had some more discomfort to deal with this week, but that statement probably has more validity today than it did last Friday.
With that, let’s review the events and conditions of the past two weeks, that build the case for that all-clear signal.
As of last Friday, more than half of first quarter corporate earnings were in, with record level positive surprises in both earnings and revenues (that has continued). And we got our first look at first quarter GDP, which came in at 2.3%, better than expected, and putting the economy on a 2.875% pace over the past three quarters.
What about interest rates? After all, the hot wage growth number back in February kicked the stock market correction into gear. The move in the 10-year yield above 3% last week started validating the fears that rising interest rates could quicken and maybe choke off the recovery. But last week, we also heard from the ECB and BOJ, both of which committed to QE, which serves as an anchor on global rates (i.e. keeps our rates in check).
Fast forward a few days, and we’ve now heard from the last but most important tech giant: Apple. Like the other FAANG stocks, Apple also beat on earnings and on revenues.
Still, stocks have continued to trade counter to the fundamentals. And we’ve been waiting for the bounce and recovery to pick up the pace. What else can we check off the list on this correction timeline? How about another test of the 200-day moving average, just to shake out the weak hands? We got that yesterday.
Yesterday, in the true form of a market that is bottoming, we had a sharp slide in stocks, through the 200-day moving average, and then a very aggressive bounce to finish in positive territory, and on the highs of the day. That took us to this morning, where we had another jobs report. Perhaps this makes a nice bookend to the February jobs report. This time, no big surprises. The wage growth number was tame. And stocks continued to soar, following through on yesterday’s big reversal off the 200-day moving average.
With all of this, it looks like “the all-clear signal has been given to stocks.”
We will get the important Q1 GDP number tomorrow. We’re already seeing plenty of evidence in Q1 corporate earnings that the big tax cuts have juiced economic activity. Not only do we see positive earnings surprises and record margins, but we’re getting positive revenue surprises too. That means demand has not only picked up, but it has exceeded what companies and Wall Street have expected.
Tomorrow will be another big piece of evidence that should prove to markets that the economy has kicked into another gear, and that an economic boom is underway. Remember, we looked earlier in the week at the sliding expectations for tomorrows growth data. Reuters poll of economists has pegged Q1 GDP expectations at 2%.
Remember, we’re coming off of two quarters of 3%+ growth. And that was before the realization of big tax cuts, which not only has increased profitability for companies, wages for employees and savings for tax payers, but has fueled confidence in the economy and the outlook. And fuels economic activity.
So, at a 2% consensus view on tomorrow’s GDP number, we’re setting up for a positive surprise on GDP. That should be a low bar to beat. And if we do get a beat on GDP, that should be very good for stocks.
As we’ve gone through this price correction in stocks, we’ve been waiting for Q1 data (earnings and growth) to become the catalyst to resume the bull trend for stocks. And it has all lined up according to script. We’ve gotten big beats in the earnings data, as we suspected. We’ve retested the 200-day moving average in the S&P 500 in the past couple of days, as suspected. And as we discussed yesterday, we have two big central bank meetings (the ECB this morning, and the Bank of Japan tonight) which should calm the concerns about the pace of move in the global interest rate market (i.e. as the ECB did this morning, the BOJ should telegraph an appetite for continued asset purchases – which continues to serve like an anchor on global interest rates).
Bottom line: With a good GDP number tomorrow, we should be on the way to a big recovery for global stock markets, to reflect an economy growing back around trend growth, corporate earnings growing a 20% and a valuation on broader stocks that remains cheap relative to the low interest rate environment.
We get a close above 3% for the 10-year yield today. This continues to capture the attention of markets, as we made another run at the 200-day moving average this morning in the S&P 500.
With all of the attention on rates, this makes the central meetings over the next 36-hours interesting. We’ll hear from the European Central Bank tomorrow morning, and the Bank of Japan tomorrow night.
Remember, we have an historic divergence in monetary policy path of U.S. relative to that of rest of the world, particularly Europe and Japan. Here’s a great graphic by the Council of Foreign Relations …
You can see the U.S. and Canada are normalizing rates coming out of the global economic crisis of the past decade. And the rest of the world is still trying to juice the economy with more aggressive monetary stimulus.
In a normal world, global capital flows into countries that are growing, with interest rates that are rising. That hasn’t translated in this post-crisis world. The Fed has been hiking rates since 2015. And the dollar index is actually lower than the levels from which the Fed started its rate normalization program.
Why has the dollar not taken off? Because the exit of emergency level policies in the U.S., and the improvements in the U.S. economy, have paved the way for exits of emergency policies in Europe and Japan. That has promoted global capital to flow out of the dollar (where it had been parked for safety throughout much of the crisis) and back to domestic economies.
Still, as we’ve discussed, the Bank of Japan’s QE program still plays an important role in the stability of global interest rates. If they were to telegraph the winding down of QE (too early), it would accelerate the pace of the move in our 10-year yield. Don’t expect that to happen.
Yields continue to grind higher toward 3%. That has put some pressure on stocks, despite what continues to be a phenomenal earnings season. This creates another dip to buy.
Yesterday, we talked about a reason that people feel less good about stocks, with yields heading toward 3%. [Concern #1] It conjures up memories of the “taper tantrum” of 2013-2014. Yields soared, and stocks had a series of slides.
My rebuttal: The domestic and global economies are fundamentally stronger and much more stable. But maybe most importantly, the economy (still) isn’t left to stand on its own two feet, to survive (or die) in a normalizing interest rate environment. We have fiscal stimulus doing a lot of heavy lifting.
Let’s look at a couple of other reasons people are concerned about stocks as yields climb:
[Concern #2] Maybe this is the beginning of a sharp run higher in market interest rates — like 3% quickly becomes 4%?
My Rebuttal: Very unlikely given the global inflation picture, but more unlikely with the Bank of Japan still buying up global assets in unlimited amounts (Treasuries among them, through a variety of instruments). They can/and are controlling the pace, for the benefit of stimulating their own economy and for the benefit of stimulating and maintaining stability in, the global economy.
[Concern #3] I hear the chatter about how a 3% 10-year note suddenly creates a high appetite for Treasuries over stocks at this point, especially from a risk-reward perspective (i.e. people are selling stocks in favor of capturing that scrumptious 3% yield).
My Rebuttal: In this post-crisis environment, a rise toward 3% promotes the exact opposite behavior. If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade. If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road. Coming out of a zero-interest rate world, bond prices are going lower/not higher.
Remember this chart …
The bond market has become a high risk-low reward investment. Meanwhile, with earnings set to grow more than 20% this year, and stock prices already down 7% from the highs of the year, we have a P/E on stocks that continues to slide lower and lower, making stocks cheaper and cheaper. That makes stocks a far superior risk/reward investment, relative to bonds – especially with the prospects of the first big bounce back in economic growth we’ve seen since the Great Recession.
As we’ve discussed, the proxy on the “tech dominance” trade is Amazon. That’s the proxy on the stock market too. And it’s not going well. The President hammered Amazon again over the weekend, and again this morning.
Here’s what he said …
Remember, we had this beautiful heads-up on March 13, with the reversal signal in Amazon.
That signal we discussed in my March 13 note has now predicted this 15.8% decline in the fourth largest publicly traded company. And it’s dictating the continued correction in the broader market.
If you’re a loyal reader of this daily note, you’ll know we’ve been discussing this theme for the better part of the last year. The regulatory screws are tightening. And the tech giants, which have been priced as if they are, or would become, perfect monopolies, are now in the early stages of repricing for a world that might have more rules to follow, hurdles to overcome and a resurrection of the competition they’ve nearly destroyed.
As we know, Uber has run into bans in key markets. We’ve had the repeal of “net neutrality” which may ultimate lead big platforms like Google, Twitter, Facebook and Uber, to transparency of their practices and accountability for the actions of its users. Trump is going after Amazon, as a monopoly and harmful to the economy. Tesla, a money burning company, is being scrutinized for its inability to mass produce — to deliver on promises. For Tesla, if sentiment turns and people become unwilling to continue plowing money into a company that’s lost $6 billion over the past five years (while contributing to the $18 billion wealth of its CEO), it’s game over.
With that said, this all creates the prospects for a big bounce back in those industries that have been damaged by tech “disruption.” And this should make a stock market recovery much more broad-based than we’ve seen.
With the sharp decline in stocks today, we’ve retested and broken the 200-day moving average in the S&P 500. And we close, sitting on this huge trendline that describes the rise in stocks from the oil-crash induced lows of 2016.
Today we neared the lows of the sharp February decline. I suspect we’ll bottom out near here and begin the recovery. And that recovery should be fueled by very good Q1 earnings and a good growth number — brought to us by the big tax cuts.
The sharp swings continue in stocks, with the bias toward the downside. And as we’ve discussed over the past two weeks, it’s all led by the tech giants. Remember, on Friday we looked at the most important chart in the stock market: the chart of Amazon (as a proxy on the tech giants). Early this afternoon, Amazon was outpacing the S&P 500 to the downside by 4-to-1, and finally the broader market cracked to follow it.
This all continues to look like the market is beginning to price in a world where the tech giants, that have taken dangerously significant market share over the past decade, are on the path of tighter regulation and a leveling of the playing field, which will result in higher costs of doing business. That will change their position of strength and open the door to a resurrection of the competition.
Remember, on the stock slide of this past Friday, the S&P 500 hit the 200-day moving average and bounced sharply. It now looks like we’ll get another test of it, probably a break, and maybe take another peak at the February lows.
Here’s a look at the chart ….
You can see in the chart above the technical significance of these levels. This represents the trend from the oil price induced lows of 2016. And the slope of this trend incorporates the optimism from the Trump election and the outlook on pro-growth policies.
With that significance at play, a breach of this support, at least for a short time, would all play into the scenario that we’ll see more swings in stocks (pain for the bulls) until we get to earnings season, which kicks into gear on April 13. And as we discussed, that should begin the data-driven catalyst for stocks (earnings and growth, fueled by fiscal stimulus).
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Stocks were down big today. The media will have fun touting the Dow’s 700-point loss. But while 700 points has good shock value, on a Dow at 24,000, it’s not what it used to be.
Still, as we’ve discussed, the media and Wall Street are programmed to fit a story to the price. And there are no shortages of potential risks to point to when stocks fall. We have trade posturing in Washington. We have a Fed that’s in a tough position, trying to balance a bullish view on growth with the perception that rising rates could choke off that growth. And we have more regulatory scrutiny growing against the tech giants — with Facebook being the latest in the hot seat.
All of that sounds like bad news. But we also have corporate earnings on pace to grow at nearly 20% this year. And that could be an undershoot, given the inability of Wall Street to calibrate the effects of tax cuts on demand. And we have a big trillion-dollar plus infrastructure plan coming down the pike too. This is all as consumers are in as healthy a position as we’ve seen in more than a decade.
But what about a trade war? Doesn’t that threaten the earnings and growth outlook. Not more than nuclear war. And that was, in the public perception, probably as much of a risk last year, as a trade war is now. Stocks went up 20% last year.
Most importantly, we’ve discussed the merits of fighting China’s currency manipulation. If we don’t, we (and the rest of the world) are destined to repeat the cycles of credit booms and busts, with a persistent wealth drain along the way.
It has to be done. And it’s best done when there is leverage. And there is leverage now, as our economic recovery has the chance to lift the global economy out of the rut of the post-crisis stagnation (i.e. everyone needs our fiscal stimulus-driven recovery to work, including China).
Now, as we’ve discussed for quite some time: Markets will correct, as they have. And corrections are a gift to buy stocks on sale. But we won’t likely see a resumption of the long-term trend higher in stocks (and likely new highs by year end) until we start seeing hard evidence that fiscal stimulus is working. And we’ll see that in earnings and growth data, much of which is still a month out.
With all of this said, we pointed last week to the signals that predicted this latest down-leg. It was the big technical reversal signals across the tech heavyweights: Amazon, Apple and Microsoft. Those three stocks led the bounce from the February lows. And those three stocks have predicted this slide and maybe retest back toward the February lows.
What may be the real casualty left from this correction in stocks, when it’s all said and done? It may be those tech giants. As we’ve discussed, the heyday of crushing competition with the advantage of little-to-no regulation, are probably coming to an end. That will change the way these companies (Facebook, Amazon, Google, Uber, Airbnb, etc) operate.
For help building a high potential portfolio, follow me in our Billionaire’s Portfolio subscription service, where you look over my shoulder as I follow the world’s best investors into their best stocks. Our portfolio of highest conviction, billionaire-owned stocks is up close to 50% over the past two years. You can join me here for the best stocks to buy in this market correction.
We talked yesterday about the important inflation data. That was in line this morning. And with that, the big 3% level on the benchmark 10-year government bond yield remains well preserved.
But stocks soured anyway on the day, and it was led by the Nasdaq.
Let’s take a closer look at the Nasdaq.
This is where the big tech giants, Apple, Microsoft and Amazon have led the charge back in the index back to new record highs over the past couple of days. Those three stocks represent about a third of the index (and contribute heavily to the S&P 500 too).
But as the three tech giants led the way up, they cracked today, and we now have some very compelling signals that another down leg for stocks may be here.
First, as the broader financial markets are still licking the wounds of the sharp correction, and still jittery, Apple hit a record high valuation of $925 billion this week (sniffing near the trillion dollar valuation mark). And then it did this today…
As you can see in this chart above, Apple put in a huge bearish reversal signal (an outside day).
So did Microsoft (a huge bearish reversal signal).
So did Amazon, after breaching record levels of $1600 over the past two days …
And, not surprisingly, same is said for the Nasdaq – a big reversal signal…
The S&P 500 had the same reversal pattern.
For perspective, if we avoided the distraction of the big cap weighted indices, the Dow chart tells us the downtrend in stocks from the late January highs remains well intact.
