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?
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?
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?
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.
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 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?