After a cool late August and early September, it’s heating up on the East Coast, with daily temperatures in the 80s. And the market has been getting warmer, too.
On Wednesday, the Dow Jones Industrial Average, the S&P 500 and Nasdaq Composite index all hit new all-time highs, and they traded at new intraday highs as I wrote this around noon Friday.
Two key lagging indexes—the Russell 2000 and Dow Jones Transportation index—have been on a tear of late, each gaining 5% since late August. Neither has regained its all-time high—and Dow Theory says the Transports would have to do that in order to confirm the DJIA’s own bull market—but they’re getting there.
I’m impressed by the strength of this rally, which is broad-based. It reflects rising confidence in the economy, which has been growing slightly faster this year, albeit well short of the 3% the Trump Administration is targeting.
It also shows investors’ weariness of the continuing stand-off with North Korea over its missile program; their belief the Federal Reserve may not raise interest rates for the rest of 2017, and their growing confidence that Congress will be able to pass some market-friendly form of tax reform.
To which I say: not so fast.
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:
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.
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.
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.
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.