All posts by Howard R. Gold

Special Subscriber Alert: Time to Reduce Risk

The stock market is living in a dream world.

Traders and money managers, focusing exclusively on higher earnings and relatively benign monetary policy, are ignoring sky-high valuations, narrowing market breadth, and an economy that’s showing underlying weakness in housing and auto sales and signs of real strain in consumer finances.

They’re also blithely accepting that pro-business tax reform is right around the corner—despite the manifest political difficulties of achieving that—and ignoring the upcoming Washington, DC trifecta of passing a budget, preventing a government shutdown and raising the debt ceiling, none of which is in the bag by any means.

And they’ve been in deep denial about how serious the problem with North Korea is, brushing off the missile test over Hokkaido island, in Japanese air space. The United States is bound by treaty to defend Japan, a core Pacific ally for more than 70 years.

And most of all, they’re in denial about the ability of the current president, Donald J. Trump, to deal with these potential crises, which could reach a crescendo in the fall. I would say, in fact, that traders and investors are so invested in the wishful thinking that tax reform will bring great profits to Wall Street and corporate America, that they are as delusional about this president as his most hardcore supporters.

But at GoldenEgg Investing®, we try to take a more clear-eyed view of these things, and here’s what we think:

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Trump Risk Is Rising

 

For the last few weeks, in my MarketWatch column and GoldenEgg Investing®, I’ve been laying out why the risk of a stock market correction is rising.

It boils down to an overvalued market that’s overdue for a pullback and some key technical signs that have started to flash yellow. You can read my whole case here and here.

But another factor is getting more and more important: the erratic behavior of the president of the United States.

Markets generally don’t trade on politics; stocks thrived under presidents as diverse as Lyndon B. Johnson, Ronald Reagan and Bill Clinton. They did well in the early years of the George W. Bush administration only to tank later. They slumped in the first two months of the Obama presidency but then started a long bull market that has lasted until today despite tepid economic growth.

Truth is, stocks generally trade on interest rates and earnings growth. Period. Geopolitical crises may prompt panic selling, but stocks almost always wind up higher 12 months later. Investors usually don’t give a damn who’s in the White House.

But though I hesitate to write these words, this time may be different.

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Let the Correction Begin!

 

Is this the start of a late summer sell-off ?

On Wednesday, the Dow Jones Industrial Average closed above 22,000 again, apparently recovering from a brief decline amid heightened tensions over North Korea’s missile program. If fear of nuclear war couldn’t derail stocks, what could?

Apparently white supremacists and neo-Nazis in Charlottesville, Va.

President Trump’s fevered, contradictory response to the violence in that university town over the proposed removal of a statue of Confederate General Robert E. Lee prompted an exodus of high-profile CEOs from two of the president’s symbolic economic councils and then the collapse of those bodies.

Suddenly Wall Street started worrying that some of the “grown-ups” in the administration, particularly Gary Cohn, director of the National Economic Council and former president of Goldman Sachs, were preparing to bail. Wall Street views Cohn as the linchpin of the administration’s efforts to get tax reform and other goodies for the business community.

The Dow tumbled 274 points on Thursday and was off another 50 points as I wrote this Friday morning.

But there was lots more to this decline than toxic racial politics.

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Where the Jobs Really Are

 

Another month, another strong jobs report.

On Friday, the Labor Department reported the economy added 209,000 new jobs in July, the second consecutive month of job growth above 200,000. The unemployment rate ticked down to 4.3%.

The report confirmed what most of us already knew: The U.S. economy is mostly in very good shape. True, workforce participation remains depressed and wage gains are subdued (both for structural reasons, I’d argue), but the good second-quarter GDP number (2.6%) and the last two jobs reports suggest growth may be picking up.

If this continues, even with 2.5% wage growth, I think the Federal Reserve will hike the federal funds rate at least once more this year, though traders currently aren’t expecting it.

Gradual rate increases, accelerating economic growth and solid corporate earnings are all good news for stocks, which is why, though a correction is long overdue, I expect the market to keep moving higher over time.

But I’d like to step back from the weekly market madness to take a closer look at what’s really happening in the job market.

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A Big Warning Sign for Stocks

 

While many of the market’s hottest stocks just keep going and major market indexes this week scored record highs—again—the bears have planted a big red flag.

On Thursday the Dow Jones Industrial Average closed at an all-time high just shy of 21,800. The day before, the Standard & Poor’s 500 index hit its record close near 2,480, and the Nasdaq Composite index reached its closing peak of 6,422.75.

Bang-up sales and earnings from FAANG stars Facebook and Netflix propelled those stocks to new all-time highs. Alphabet, parent company of Google, and Amazon had sharply lower second-quarter results, wiping out the brief ascent of Jeff Bezos, who owns 17% of Amazon’s outstanding shares, past Bill Gates on the Forbes list of the world’s wealthiest people, with a net worth of over $90 billion. Nice work if you can get it.

I’ve written recently that the FAANG stocks are ripe for profit taking or correction. These are great, disruptive businesses, but investors have piled into these shares and they now trade at hefty, if not nosebleed, valuations. Even trees don’t grow to the sky.

Yet the market may have a bigger problem than the FAANGs.

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The Great European Stock Rush

 

Tired of getting merely good returns from U.S. stocks? Looking for greener pastures?

I’ve got just the place for you: Europe.

That’s right, Europe, which just a few short years ago seemed headed to the fiscal abyss, as first, Greece, then Spain and Italy, were on the brink of default.

Now, Europe’s all the rage among global investors, who cite the Old Continent’s lower valuation than the relatively expensive Standard & Poor’s 500 index and the European Central Bank’s much more accommodative monetary policy than that of our own Federal Reserve.

So, should you sell U.S. stocks and take the plunge into European markets?

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Investing Isn’t All Black or White

 

Another trading day, another record close. Yawn.

On Friday the Dow Jones Industrial Average and the Standard & Poor’s 500 index both notched their latest record highs while the Nasdaq Composite index nudged very close to its own peak.

New highs are so routine now, they’d be boring—if we weren’t making money. Nothing dull about that.

But what’s particularly notable is the slow grind higher while bond yields also tick upwards and the CBOE Volatility index (VIX) has slipped below 10 again, closing in on its low since December 1993.

I’ve dubbed the VIX the Complacency Index, and there’s sure a lot of that around, but I don’t see the kind of euphoria typical of a market top; in fact, investors seem to have a “meh” attitude about stocks even as they keep hitting new highs.

What does this show?

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The Big Jobs Report Number No One Noticed

 

June’s jobs report, released Friday morning, was the best in months, by almost every measure.

The headline number was that in June the U.S. economy added 222,000 jobs, the most since February. Also, the April and May totals were revised upward by 47,000, demolishing the idea of a “weak spring”: The last three months saw 194,000 additional jobs on average.

The unemployment rate ticked up to 4.4%, but that may have been because more discouraged workers reentered the labor force. (Workforce participation rose in tandem with unemployment last month.)

And, in a disappointing number, hourly earnings grew by only 0.2%, or 2.5% over the last 12 months. Despite a labor market close to full employment and theoretically millions of unfilled jobs, employers still haven’t found it worth their while to raise wages.

But in all the punditry and instant analysis that followed, one number got short shrift, in my opinion.

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A Tired Market Takes a Breather

 

This week the Dow Jones Industrial Average and Standard & Poor’s 500 index both hit new all-time highs, but it sure didn’t feel like it.

Volume, which has spiked periodically on new highs—or on the days the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet, or Google) sold off big—has been average at best.

The Nasdaq Composite index and the FAANGs themselves have bounced back a bit from their recent correction, but they’re still off their record highs.

Wall Street’s so-called “fear” Index, the CBOE Volatility index, or VIX, is hovering just above ten again, again in complacency territory.

So, what, besides early-summer doldrums, is going on?

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Stuck in the Middle with Stocks

 

Last Friday and Monday’s sell-off in the FAANGs (Facebook, Amazon, Apple, Netflix, and Google—or Alphabet) may have been the end of the recent mania for those high flyers, but I don’t believe it was the end of the bull market.

Late Friday afternoon, the Dow Jones Industrial Average and the Standard & Poor’s 500 index were within a whisker of their all-time highs, and the Nasdaq Composite index, which bore the brunt of the FAANG selling, was still only about 3% off its record peak.

The FAANGs, however, have remained subdued, except for Amazon which announced Friday morning it was buying Whole Foods Markets for $13.7 billion.

Instead of a major correction or bear market, I think we’re likely seeing rotation away from the super-momentum FAANGs and back towards the cyclicals, which led the so-called Trump rally.

Financial ETFs, for instance, have seen a big inflow of investor cash as some of the big Wall Street firms take profits on their holdings of the FAANGs and redeploy them to the sectors that set the pace between Election Day and early March.

Will it work?

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