The Bull Thread

On Again/Off Again Tariffs & It’s a Pre-Election Year

Even though it has only been a handful of weeks since these charts were last updated and presented, they do put the last few weeks of trading into a broader view. As of today’s close, DJIA is up 9.9% year-to-date. S&P 500 is even better at 13.7% while NASDAQ is still best at 17.9%. Yes, this is down from late-April/early-May highs, but still solid numbers when compared to this point in past pre-election years and especially all years. The recent pullback and the nascent recovery rally could gather further steam and run until early-July (and perhaps challenge old highs again), but from around mid-July until October seasonality becomes a headwind and more backing and filling is likely again.

 

lol @hitman

and good to see you checking in here!

get ready for the fireworks in july

 

Stocks Stand Tall Against Headwinds

Renewed trade tensions have led to this latest bout of volatility. The recent drop in the S&P 500 Index felt worse because of how quickly it happened—from new highs to down nearly 5% in less than two weeks. Keep in mind stocks have come pretty far pretty fast, beginning with the strong rally at the first of the year that put the S&P 500 back at record highs.

Swift rallies like this have also tended to lead to drawdowns as stocks typically have lost some steam midyear—hence sparking the well-known market adage “Sell in May.” The stock market was probably due for some volatility. The S&P 500 has averaged more than three pullbacks of 5% or more each year since 1990, and we’re still waiting for our first one this year. “Even though volatility has picked up, and may be with us for a while as risk of a bigger trade war lingers, a pullback or two in the coming months would be totally normal, even with fundamentals still in solid shape,” explained LPL Senior Market Strategist Ryan Detrick.

The U.S. economy continues to grow at a solid pace, it’s steadily creating jobs, wages are broadly rising, and some benefits of tax reform and other fiscal spending are still flowing through. We expect a pickup in business investment to help extend this economic cycle. Key risks beyond a full-blown trade war include lackluster growth in Europe, a messy U.K. divorce from the Europe Union, and rising geopolitical risk in the Mideast.

According to the U.S. Treasury, China has cut its holding of U.S. Treasury securities to a 22-month low, potentially in retaliation as the trade dispute lingers. “What isn’t discussed as much, though, is that global demand remains strong, with foreign ownership of U.S. debt hitting a record high last month,” added Detrick.

As our LPL Chart of the Day shows, China has been decreasing how much U.S. debt it holds, while Japan has silently increased its holdings for five consecutive months.



Last, we remain hopeful that the United States and China will reach some kind of a trade agreement—or at least a trade truce—in the next few months. President Trump cares about the stock market and the economy, and considers both part of his path to re-election. Both sides have a lot to lose from further escalation. And the two sides already came very close to a deal, which suggests the remaining sticking points can be worked out.

 

Earnings Season Takeaways

We consider earnings season a success based on the amount of upside to prior estimates generated by S&P 500 Index companies despite several headwinds. Companies handily beat expectations to get first quarter earnings up to flat, as shown in the LPL Chart of the Day.



When earnings season began in mid-April, consensus estimates called for a 4–5% drop in S&P 500 earnings, according to FactSet data. Beating results by this much is impressive considering persistent trade uncertainty and the drag on overseas profits from a strong U.S. dollar. Also consider that the median stock in the S&P 500 has grown earnings several percentage points faster because a few large companies are dragging down the market-cap-weighted calculation.

Resilient estimates are also encouraging. Since April 15, the 2019 consensus estimate for S&P 500 earnings per share has risen slightly to $168 (a 4% year-over-year increase). We consider that a win given that estimates typically fall during earnings season.

“Escalating trade uncertainty and the threat of more tariffs are huge wild cards for corporate profits,” said LPL Chief Investment Strategist John Lynch. “We are hopeful that significant progress can be made on the trade front next month, when President Trump and China’s President Xi are expected to meet at the G20 summit. A prolonged impasse that lasts through the summer would make mid-single-digit earnings growth difficult to achieve in 2019.”

Our base case remains that we will get a trade deal with China early this summer and consensus expectations for 3–4% earnings growth may prove to be conservative. Earnings are hardly booming, but with a continued economic expansion, low inflation, and low interest rates, we see enough earnings growth ahead to push stocks up to our year-end S&P 500 fair value target of 3,000—though it probably won’t get there in a straight line.

 

Another Reason For Bulls To Smile

The S&P 500 Index has officially gained each of the first four months of the year for the first time since 2013. This comes on the heels of the best first quarter since 1998. Six straight months in green has been the best monthly win streak to start a year, and that last happened in 1996.

Starting a year with strength like this historically has been a good sign, even though stocks in May saw a nearly 5% correction.

“Although we wouldn’t be surprised to see continued volatility over the coming months, the good news is a great start to a year has had a funny way of eventually resolving higher,” explained LPL Senior Market Strategist Ryan Detrick. “In fact, the rest of the year has been higher an incredible 14 out of 15 times after the first four months were in the green!”

As our LPL Chart of the Day shows, the S&P 500 returns the rest of the year (final 8 months) have been more than twice as strong as the average year returns—10% versus 4.7%—following four straight monthly gains to kick off a new year. There’s always a catch though, and in this case we’ve seen an average pullback of more than 8% the rest of the year.

 

Jobless Claims Hold
Thu, May 23, 2019

Weekly jobless claims released this morning came in at 211K, which was below expectations of 215K and the 212K reading last week. The seasonally adjusted number has now spent 71 straight weeks below 250K and 220 consecutive weeks below 300K.



After rising to 225K last week, the four-week moving average also saw a modest decline. The moving average fell to exactly where it was at the start of the month (220.3K). This comes as one of the recent highs of 230K has rolled off of the average. Turning to next week, assuming we see a similar print to this week, another data point of 230K will fall out of the average, so we may see another drop in the four-week average as well.



As per usual, non-seasonally adjusted (NSA) jobless claims came in well below the average for the current week since 2000. At 191.3K, NSA claims are over 100K below this average. This week's print is also the lowest for the current week of the year of the current cycle and going back to at least 2000. With this new low for the current week of the year, the past couple of weeks' releases have been a welcome change from the YoY increases in the NSA data that has been frequently observed this year.

Overall, the data has been somewhat mixed recently. Though initial claims more or less held steady this week, continuing claims saw the opposite result as they rose from the previous week and missed forecasts with a print of 1,676K (1,666K expected). While initial claims appear to still be chugging along just fine (YoY increases aside), continuing claims still have not made a new low since last October. That is not necessarily a horrendous thing for either considering the data has also not rocketed higher by any stretch, but it does confirm that the pace in claims falling has somewhat slowed relative to previous years.

 

Pre-election Year June: Tech and Small-caps Best

June has shone brighter on NASDAQ stocks over the last 48 years as a rule ranking eighth with a 0.6% average gain, up 26 of 48 years. This contributes to NASDAQ’s “Best Eight Months” which ends in June. June ranks near the bottom on the Dow Jones Industrials just above September since 1950 with an average loss of 0.3%. S&P 500 performs similarly poorly, ranking tenth, but essentially flat (–0.02% average). Small caps also tend to fare well in June. Russell 2000 has averaged 0.6% in the month since 1979.

In pre-election years since 1950, June ranks no better than mid-pack. June is the #8 DJIA month in pre-election years averaging a 0.8% gain with a record of nine advances in seventeen years. For S&P 500, June is #5 with an average gain of 1.2% (10-7 record). Pre-election year June ranks #6 for NASDAQ and #7 for Russell 2000 with average gains of 1.9% and 1.1% respectively. Recent pre-election year Junes in 2015, 2011 and 2007 were troublesome for the market as DJIA, S&P 500 and NASDAQ all declined (Russell 2000 eked out a modest gain in 2015).

 

Fed Members Side With “Transitory” Inflation

Investors just got more details on Federal Reserve (Fed) policymakers’ views of inflation.

Minutes of the Fed’s most recent meeting, which ended May 1, showed that “many participants” considered slowing consumer inflation as “transitory,” and agreed that the Fed’s current patient approach should help stoke economic growth and inflation. Policymakers’ optimistic view on inflation runs counter to a growing opinion in financial markets that slowing growth in core personal consumption expenditures (PCE) could warrant lower rates.

Markets think the grace period for a “transitory” excuse has passed, but data show it’s too soon to tell. Another measure of inflation, the Fed Bank of Dallas’s “trimmed mean” PCE measure, points to higher pricing pressures ahead. As shown in the LPL Chart of the Day, the trimmed mean PCE, which has proven to be a less volatile version of core PCE, has hit 2% year-over-year growth for the past several months.



“It’s tough to make a case for lower rates with over 3% gross domestic product growth, healthy wage growth, and a labor market close to full employment,” said LPL Research Chief Investment Strategist John Lynch. “If consumer inflation picks up, the U.S. economy will be near full employment with healthy inflation across the board, fulfilling the Fed’s dual mandate.”

Of course, much has happened on the global front since the Fed’s last meeting. Trade tensions have flared up again, with the United States raising tariff rates on $200 billion of Chinese imports and threatening to increase rates on the remaining swath of goods. Logically, tariffs should be a catalyst for higher consumer inflation, as higher costs should boost price growth. However, the opposite has happened over the past few months, and there are several factors to consider when thinking about future inflation.

Overall, we don’t see a strong argument for a rate cut right now, and we side with the Fed in thinking consumer inflation could pick up as wage growth accelerates and growth stabilizes. At the very least, it’s becoming more obvious the Fed doesn’t have enough clarity to move policy in either direction.

 

Confidence Rebounds
Tue, May 28, 2019

Despite rising trade tensions with China, rising geopolitical concerns with North Korea and Iran, and a weak stock market, US consumers remain surprisingly confident. In the latest read for the month of May, Consumer Confidence rose much more than expected, hitting a level of 134.1 up from last month's reading of 129.2 and much higher than the consensus forecast of 130. At current levels, overall sentiment isn't far from its peak reading of the cycle (137.9) from last October.



While the gap between consumers' perception of their Present Situation and Expectations remains uncomfortably wide, both measures saw comparable increases this month. In the case of the Present Situation component, though, that reading is at a new high for the cycle (highest since December 2000).



The main reason consumers remain so confident in the face of macro headwinds is that the job market remains so strong. The percentage of consumers responding that jobs are 'plentiful' rebounded to 47.2% in May, which is a new high for the cycle and the highest monthly reading since January 2001.



To us, the most surprising aspect of this month's report is the fact that sentiment towards the stock market improved. Even though all of the major US equity indices are down in May, the percentage of consumers expecting stock prices to rise increased to 42% from 37.3%, while the percentage of bearish consumers dropped to 22.2% from 24.4%. From a contrarian perspective, it would be much more preferable to see sentiment turning more cautious as stock prices declined.

 

Initial Jobless Claims Steady Again
Thu, May 30, 2019

This week's release of Initial Jobless Claims from the U.S. Department of Labor was pretty uneventful as the seasonally adjusted data was in line with expectations at 215K. That is a slight rise from the upwardly revised 212K (originally 211K) last week. That revision means that claims for last week had been unchanged from the prior release. In the past couple months, the seasonally adjusted numbers have seen this sort of pattern before. In the final weeks of April, claims came in at their recent high of 230K two weeks in a row. This was followed by a 2K lower reading of 228K. The weeks since have basically mirrored this with the aforementioned two consecutive weeks of a print of 212K and now this week's 3K rise to 215K. Keeping steady like this, claims have remained below 250K for 72 weeks now, and have been below 300K for 221 weeks now.



As the previously mentioned highs from late April have continued to roll off, the four-week moving average has fallen for its second straight week down to 216.75K from 220.3K last week. Like the seasonally adjusted level data, the four-week moving average now sits in the middle of its recent highs and lows. This means that this week's reading continues to not indicate any sort of new direction for the data, rather, it is showing labor data is simply holding up at healthy levels.



The non-seasonally adjusted number rose to 196.1K compared to 191.3K last week. That rise is typical for the current week of the year. As shown in the chart below, over the next several weeks of the year headed into the summer months, the data has usually seen a seasonal uptick. Given this and in spite of the rise, this week's reading is still indicating a healthy labor market as it remains below levels from last year and all prior years of the current cycle. It is also still well below the average for the week of the year going back to 2000.

 

DJIA and S&P 500 Up Six Straight on June’s First Trading Day

According to the Stock Trader’s Almanac 2019 (page 86), the first trading day of June is the sixth best first trading day of all twelve months with DJIA gaining a cumulative 299.85 points since 1998. Over the past 24 years, DJIA’s first trading day of June has produced gains 70.8% of the time with an average gain of 0.04%. Sizable losses in 2002, 2011 and 2012 limit overall performance. S&P 500 has advanced 66.7% of the time. NASDAQ has been slightly weaker at 58.3% as has the Russell 2000 at 62.5%. Following three straight losses from 2010 to 2012, DJIA and S&P 500 have advanced six straight years on the first trading day of June.

 

ISM Services Sigh of Relief
Wed, Jun 5, 2019

After the weakest ADP Private Payrolls report (in terms of the actual reading and relative to expectations) in close to a decade earlier this morning, investor anxiety heading into the ISM Services report for May was understandably high. While economists were expecting the headline index to decline slightly from 55.5 down to 55.4, it actually saw a modest increase rising to 56.9. On a combined basis and accounting for each sector's share of the overall economy, the May ISM Composite PMI rose from 55.2 up to 56.4.



As you might recall, tariffs were a major issue in the commentary section of the ISM Manufacturing report, and while they were also an issue in the commentary section of the Services report, it wasn't as prevalent. As shown in the graphic below, the issue only showed up in four of the ten comments, and in one of them it was saying that the issue of tariffs "doesn't seem to matter."



While the headline reading of the ISM Services report showed a m/m increase, breadth in this month's report wasn't particularly strong. Of the index's ten subcomponents, six showed m/m declines in May and eight showed y/y declines. One positive outlier, though, was Employment, which increased from 53.7 up to 58.1. It figures that on the same day we saw the weakest ADP Private Payrolls report in nearly a decade, that we would also see the largest m/m increase in the Employment component of the ISM Services report in two years. Really clears things up!

 

Claims Still Steady
Thu, Jun 6, 2019

Last week, we noted that Initial Jobless Claims have not been changing by much recently. That trend of steady claims has continued this week as seasonally adjusted numbers came in unchanged from last week's upward revised 218K. That is slightly above estimates of 215K but still healthily below recent highs of 230K. Looking back on the May data, claims came in at 212K in the first two weeks and finished with 218K in the final two weeks. So again, labor data has been steady as far as this indicator goes. The streak of weeks below 250K now sits at 73 and claims have also sat below 300K for a record 222 consecutive weeks. That all may come as a surprise after yesterday's huge miss in the ADP employment number, but to make sense of this, it seems that while labor data could see some slowing in job creation, people are also not exactly losing jobs at a worrying rate either.



The last of the recent highs in the seasonally adjusted data has now come off of the less volatile four week moving average. Even with last week's revision higher and this week's 218K print, the moving average has fallen for its fourth week in a row down to 215K from 216.75K last week. While those declines are a good sign, the moving average also still has yet to make a new low since doing so back in mid-April when it fell to 201.5K.



In line with seasonal patterns observed over the past several years, non-seasonally adjusted jobless claims fell this week to 188.7K. That is the lowest reading of the current cycle and going back to at least 2005. In addition, this week's non-seasonally adjusted number is well over 100K below the average for the current week of the year since 2000 of 292.04K.