Lucky Friday the 13th for Stocks

 

It’s Friday the 13th. If you’re suspicious (or excessively careful), you should avoid black cats, spiders, cracks in the sidewalk, or lakes where a camper named Jason drowned years ago.

But one thing you shouldn’t avoid—at least for now—is stocks, because at least over the last couple of weeks they’ve mounted a stealthy but solid rally.

The Standard & Poor’s 500 index is up more than 100 points since the end of June, and it’s now only 2.5% below its all-time high set January 26th. The Dow Jones Industrial Average has picked up nearly 900 points over the past 12 trading days, and is 6% off its all-time high.

This has happened despite a heating up of the trade war which Treasury Secretary Steven Mnuchin said is not a trade war, but only “trade disputes” with China. (More on him later.) Meanwhile, yields on ten-year Treasuries have settled comfortably below 3% (they yielded 2.84% around midday Friday) and the U.S. dollar index has climbed from below 89 in February to almost 95 Friday.

So, what’s behind it?

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How to Survive the Coming Retirement Crisis

 

In my MarketWatch column this week, I laid out why a Retirement Apocalypse could hit during the 2020s.

You can read the whole piece here. But these are my main points:

  • If current trends continue, the Social Security and Medicare trust funds will run out of money over the next 15 years.
  • The 2020s will see a bear market in stocks and an economic recession, which could decimate Baby Boomers’ savings just as they retire.
  • A decade of low returns in stocks, which may follow our current decade of spectacular outperformance, would be disastrous for state and local pension funds and the governments that fund them.
  • Tax cuts and Congress’s recent  spending spree will mean trillion-dollar deficits as far as the eye can see, giving the federal government little wiggle room when a recession and bear market hit.
  • The federal funds rate is still only 2% and the Federal Reserve has more than $4 trillion on its balance sheet, so it won’t have many tools to fight the next recession.

This would be a very, very bad scenario. How should investors prepare? Here are three things to do and not to do.

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Trade Fears Knock Stocks

 

It’s official: Trade wars are bad for stocks.

Since the latest round of trade tensions broke out a couple of weeks ago, markets have headed down, down, down.

Friday’s 163-point advance in the Dow Jones Industrial Average followed eight consecutive days of decline. Had the Dow closed down Friday, it would have been its worst stretch in four decades. The Industrial Select Sector SPDR ETF (XLI) is down around 10% from its late January peak. Leading U.S. exporter Boeing, which nearly doubled last year, has slid almost 10% since June 12th.

Chinese stocks, which would surely feel the brunt of any extended trade war with the U.S.. are off around 20% since late January, another cyclical bear market within Shanghai’s 11-year, “secular” bear.

As I wrote in MarketWatch this week, China has dragged emerging markets ETFs down, too. (GoldenEgg Investing® has never recommended emerging markets, because in the long run they give you lower return than from U.S. stocks, and at higher risk.)

President Donald Trump, who thinks all the trade deals negotiated by previous presidents sold America down the river, has threatened full-fledged trade war, not only with China but also with Mexico, Canada and the European Union.

Trump often talks big but then backs down (his slogan could be “speak loudly and carry a small stick”). Is it for real this time? And what effect could a genuine trade war have on the markets and economy?

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Four Rate Hikes Is No Big Deal

 

Let’s see how certain “big” news events affected stocks lately.

President Donald Trump doubled down on threats to impose tariffs on Chinese imports. Stocks took off. He then lashed out at close ally Canadian Prime Minister Justin Trudeau. Stocks did nothing. He touted great progress at his historic summit meeting with North Korean dictator Kim Jong in Singapore. Stocks sold off modestly.

Most importantly, the Federal Reserve raised the federal funds rate ¼ point Wednesday and said it was likely there were going to be four, not three, rate hikes this year. How did investors react to this “seismic” event?

Yawwwwwwwn. From Tuesday’s close through Thursday’s close, the Dow Jones Industrial Average fell a couple of hundred points and the S&P 500 has basically done nothing.

So, is the market finally free from the Fed?

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June Is Busting Out All Over

 

The end of May saw a rush of volatility, as if the markets were suffering from seasonal allergies.

The S&P 500 index rose or fell by more than 1% in three of the four trading days in May’s final week, following the Memorial Day holiday, while the Dow Jones Industrial Average gained or lost at least 200 points every session.

Then, having gotten the bugs out of their system with one big sneeze, markets quietly started marching higher.

From May 29th through early Friday afternoon, the Dow gained almost 900 points, while the S&P 500 added nearly 100. The Nasdaq Composite index and the Russell 2000 small cap bellwether both hit all-time highs. And the CBOE Volatility index—the VIX—held fairly steady, about 13 or so. That’s much higher than its all-time low of 9.14 last November, but well below its average around 20.

So, it looks like markets are settling down a bit. Or are they?

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Fuhgeddabout Italy

 

Italy is known for its magnificent scenery, extraordinary art, great food and terrific wine. It’s also known for its stagnant economy and dysfunctional politics.

Government debt is 132% of GDP (vs. around 100% and growing in the U.S.) and the European Commission was actually thrilled to see GDP grow at 1% this year, which they called an “acceleration.” (From what, you might ask.)

The country has had more than 65 governments in the 73 years since World War II ended. Attempts to form the latest one started a mini-crisis early this week.

Sergio Matarella, the country’s president—a largely ceremonial position—refused to accept a finance minister picked by the prime minister in waiting, Giuseppe Conte, who had been chosen after months of negotiations by a coalition of the far-right, anti-immigrant League and the populist 5-Star party. The two anti-Establishment parties pulled off a stunning upset when they won 50% of the vote in March’s parliamentary elections.

Matarella’s move threw markets into turmoil Monday, even though it delayed the formation of a profoundly anti-European Union government that actually might begin to move Italy out of the European Union and euro (call it “Itexit”).

On Tuesday, the Dow Jones Industrial Average plunged nearly 400 points and the Standard & Poor’s 500 index lost more than 1% of its value.

But then something strange happened.

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Uncertainty Thy Name Is Trump

 

It’s Memorial Day Weekend, when many Americans will hit the beach—at least those who got away early will, before the storms hit.

The markets, too, are going through a “just when you thought it was safe to go back in the water” moment. And the big storm–or shark– that’s looming is named Donald J. Trump.

Earlier this week, markets rallied when it looked like the U.S. and China had agreed to a partial trade agreement that didn’t include heavy tariffs or specific dollar reductions in the trade deficit.

But just as soon as the media lambasted the president  about that, he pivoted to a harder-line stance, telling the Commerce Department to determine whether imports of automobiles and auto parts constituted a threat to “national security.” Yes, you read that right.

On Thursday, he pulled out of the proposed summit with North Korea, telling its president. Kim Jong un, that they had had a “wonderful dialog” and he was “very much looking forward to being there with you.” But, unfortunately, Trump was just not into him.

What happened?

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Ten-Year Yields Go Up, Up and Away

 

This was the week we found out which way the yield on the ten-year Treasury note is going: Up!

For the last several weeks, the yield on the benchmark Treasury note has pushed up against the 3% barrier a few times, only to quickly slide back to as low as 2.72% on April 2nd. Bond yields rise when prices fall (and fall when bond prices rise), so the up-and-down moves suggested investors were engaged in a tug of war over which direction it will ultimately go.

When markets can’t resolve the struggle between bulls and bears, technicians look for key inflection points—resistance at the top of a trading range, support at the bottom—that telegraph decisive moves either way.

The 3% yield on the ten year Treasury was such a resistance point. This week, it blew right through that hard barrier and all the way up to 3.11% on Thursday. Not only was that much higher than its previous high of 3% back in December 2013; the fact that the ten year stayed well above 3% for the last couple of days (its closing yield Friday was 3.07%) suggests its rise is a keeper.

So, why is it happening and what does it mean?

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Back to Normal?

 

You might not have noticed, but  stocks have been on a tear.

As I write this Friday morning, the Dow Jones Industrial Average and Nasdaq Composite index are on track for a seventh consecutive day of gains. That would mark the Dow’s longest winning streak since last October.

The Dow is up more than 900 points since May 2nd, the S&P 500 index has tacked on 100 points and the Nasdaq more than 300. Each has advanced nearly 4%.

That comes amid the best earnings season in years—one that up until now got no respect—and a ten-year Treasury note whose yield stubbornly refuses to stay above 3%.

The CBOE Volatility index (VIX) also has gradually worked its way down to just above 13, way below its panic peak of 37+ on February 5th. Will we soon see a single-digit VIX again?

So, what’s behind this apparent return to normal?

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Is This the Peak?

 

What happens when things are as good as they get?

That’s what many people must have been wondering when the April jobs report was released early Friday morning. The U.S. economy added 164,000 jobs, the unemployment rate fell below 4% for the first time since December 2000, and average hourly earnings rose by only 2.6% on an annual basis.

There was far too much hand wringing about the employment figures, which were below economists’ projections. Yes, it was a little short, but the average job creation for the last three months topped 200,000.

But that missed the entire point: At 3.9% unemployment, the economy is at full employment.

Yes, there are still a lot of people out of the labor force, but retirements, disabilities from drugs or injuries, millions of ex-cons and parolees, and people who just don’t have 21st Century job skills have kept the workforce participation rate low.

With employers across the country practically begging to fill thousands of open positions, that sure sounds like full employment to me.

But even with that, wages rose by far less than economists projected, tamping down fears of inflation. The ten year Treasury note yielded 2.95% at the close—below the magic 3% number—and the Dow Jones Industrial Average rallied 332.36 points Friday.

So, is it too good to be true?

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