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?
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?
Politics dominated the news this week from Washington to London, but Rip van Wall Street might as well have slept through it all.
In some of the most dramatic Congressional testimony in years, fired FBI Director James Comey told a Senate Intelligence Committee hearing that President Donald Trump had lied and tried to defame him and the Bureau.
Comey also laid out some facts about their encounters that could constitute obstruction of justice of the investigation of connections between the Trump campaign and the Russian government. (He said the president himself wasn’t under investigation, which Trump later tweeted was “total and complete vindication.”)
Meanwhile, across the pond, the Conservative Party lost its parliamentary majority as the opposition Labour Party picked up 31 seats in the House of Commons. That left Prime Minister Theresa May, who called the snap election to get a bigger working majority, scrambling to form a government as the U.K. prepares to enter “Brexit” negotiations with the European Union.
And how did the markets react to all this “turmoil”? As of late Friday afternoon, the Dow Jones Industrial Average traded at new all-time highs, but the Nasdaq Composite index sold off big on heavy profit taking.
So, do these big political events matter?
Another month, another jobs report, and another mixture of good and bad news.
The good news was that unemployment fell to 4.3% in May, down half a percentage point since January and its lowest since 2001. Job growth was strong in the perennial winners, health care and professional and business services. Wages also grew at an annualized 2.5%, not great but still on target.
And that was it.
Employment growth of only 138,000 was well under economists’ consensus estimates. Job growth in March and April turned out to be 66,000 less than was previously reported. And job growth has clearly decelerated, from an average 181,000 over the past 12 months to only 121,000 over the last three, about a one-third decline.
This chart from Econoday on Barrons.com shows that job growth likely peaked in February 2015 and has been slowing ever since. Meanwhile, the workforce participation rate, the Achilles’ heel of this recovery, slipped 0.2% to 62.7% in May after having stabilized a bit recently.
And the Dow Jones Industrial Average, Standard & Poor’s 500 index and Nasdaq Composite index all hit new all-time highs in late afternoon trading.
What does all this tell us?
Corrected: It’s Senate Majority Leader Mitch McConnell.
I can’t remember a single time in recent years when the stock market, the economy, politics, and investors’ behavior were less in sync.
On Friday, the second revised GDP report for the first quarter of 2017 showed a 1.2% annual real increase—double its first estimate of 0.6%, but still pretty feeble. Meanwhile, durable goods orders dropped 0.7% in April, a bad sign for the second quarter but in line with the weak “hard” economic data I wrote about in my MarketWatch column this week.
Yet The Dow Jones Industrial Average, Standard & Poor’s 500 index, and Nasdaq Composite index rose six days in a row through Thursday, and the latter two again hit record highs.
So, how did investors react? They sold $3.3 billion worth of U.S. stocks this week, according to Bank of America Merrill Lynch, after having unloaded $9 billion last week. Maybe they’re selling on the good news, but I doubt it: According to the Investment Company Institute, they’ve been pouring money into underperforming foreign stocks, particularly emerging markets, for years.
And the prospects in Washington for health care reform, tax reform, and infrastructure (key pillars of the Trump rally) are fading.
How do we sort this all out?
Well, that didn’t last long, did it?
Just last week investors didn’t have a care in the world, despite what in retrospect was a gathering storm around President Trump’s firing of FBI Director James Comey.
The CBOE Volatility index (VIX), dubbed Wall Street’s fear index but which I call its complacency index, didn’t move up much from its 24-year low of 9.77 last Monday. “So, if the Comey Affair doesn’t matter to markets—yet—what does?” I wrote.
That “yet” should have been in capital letters, because after the blockbuster report in The New York Times that Comey had a memo saying the president had asked him to end the FBI’s investigation of ties between Russia and the Trump campaign, markets were gripped by a mini-panic.
On Wednesday, the Dow Jones Industrial Average plunged 372 points, the Standard & Poor’s 500 index slid 1.8%, and the VIX spiked 50% in a single day, to close at 15.59. That same evening, Deputy Attorney General Rod Rosenstein named former FBI Director Robert Mueller special counsel for the Russia investigation.
That’s calmed jittery markets (the VIX was trading near 12 Friday), but was it really back to normal again?
The political world is agog over the fallout from President Donald Trump’s firing of FBI Director James Comey. But investors? Not so much.
The event and the constantly changing rationales coming from the White House are making cable news executives smile. Neither conservative Fox News nor progressive MSNBC nor center-left CNN are having problems filling air time—or, as they say in the trade, feeding the beast. And it’s been driving ratings to the sky.
Even print media stalwarts, who now claim to be “digital first,” like The New York Times, Washington Post, and Wall Street Journal are racking up good old-fashioned scoops and boosting subscriptions by the most in years.
But Wall Street is keeping its cool. Over the last three weeks the Dow Jones Industrial Average has been stuck within a 125-point trading range, while the Standard & Poor’s 500 index hasn’t swung more than 25 points either way.
Meanwhile the CBOE Volatility index (VIX), which people call Wall Street’s “fear index” but I think is more accurately its complacency index, has ticked up from a 24-year closing low of 9.77 Monday to 10.72 late Friday. Still, that’s way below where it’s been for most of the year and suggests nervous jitters rather than real fear.
So, if the Comey Affair doesn’t matter to markets—yet– what does?
Spring came late this year in the Northeast as a late March blizzard threw off the normal seasonal rhythms. But now the trees are green, the flowers are blooming, and allergy sufferers—of whom there are several at home—are downright miserable.
The economy, too, has gone through a long winter. But with Friday’s jobs report, well, spring may have sprung.
Employers added 211,000 new jobs in April, well above consensus estimates of 185,000 and more than 2 ½ times March’s revised figures of 79,000 new jobs added. It marks the third out of the first four months this year in which job growth topped 200,000. Average job growth over the past three months was 174,000, pretty much in line with last year.
Even more impressive, the unemployment rate fell to 4.4%, the lowest it’s been in a decade, since before the financial crisis. That was as low as it got in the last economic cycle, so if this isn’t full employment, what is?
I can see at least two possible outcomes here.
Up one day, down the next, then up again, then down. That’s how stocks have been behaving lately.
And don’t blame the usual suspects. The Federal Reserve is on a clear course to gradually—the word Fed Chair Janet Yellen has been using for the last couple of years—raise interest rates, which remain historically low.
The big question hanging over the Fed, of course, is how to shrink its $4.5-trillion balance sheet, which it built through massive bond buying after the financial crisis. But the central bank is likely to be even more cautious with that.
The second big pillar of stock performance—earnings—have been doing just fine. Sheraz Mian of Zacks wrote that as of Wednesday first-quarter earnings are ahead of expectations, as 75% of companies in the Standard & Poor’s 500 index reporting thus far have beaten earnings estimates and 54% have topped sales expectations. Mian expects earnings for S&P 500 companies to be up 8.6% over last year. That’s the best quarterly performance in quite a while.
So, with the Fed moving slowly and earnings rising strongly, stocks should be advancing, right?
But they’re not, so we need to look at the un-usual suspects.