Currency Crisis Halts S&P’s Big Move

 

On Monday the Standard & Poor’s 500 index was poised to hit a new all-time high.

Just 15 points shy of its record peak of 2872.87, set on January 26th, the S&P was coming off a week of solid advances and a second-quarter earnings season that knocked the cover off the ball: With over 80% of S&P 500 companies having reported, earnings rose by a torrid 24% year over year.

That followed a solid July jobs report and strong second-quarter GDP growth of 4.1%. And with all the good news and recent stock gains, the S&P still changes hands at 16.5x 12-month earnings projections—pretty much in line with its five-year average, according to FactSet Research.

With fundamentals and valuations this good, what could possibly go wrong?

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The Market Needs to Hit New Highs

 

From early April, the S&P 500 index rose 10% from a low of around 2581 to 2,846 on July 25th. That was within 26 points—less than 1%–of its late January all-time high of 2,872.87.

Since then, it slipped a bit to just above 2800, but then retraced its steps to  close at 2827 Thursday.

The Dow Jones Industrial Average followed a similar trajectory, while the Nasdaq Composite and small-cap Russell 2000 indexes, which had healthy rallies of 22.6% and 14.3%, respectively, from their February lows, made new all-time highs in July. They, too, have slid in the weeks since and are beginning to inch up again.

The escalating trade war between the U.S. and China—and it’s no longer a question of “whether” we’re in a trade war; it’s how serious it’s going to be—has had an impact, particularly on the Dow, which includes giant exporters like Boeing and Caterpillar.

But 30% of the S&P 500’s revenues comes from overseas, and the big tech companies on the Nasdaq have huge international sales, too. Even the mostly domestic Russell, lately a haven for trade war-wary investors, would be hurt by the higher inflation punitive tariffs would unleash.

The big question now is, can the market get to new highs, and why does that matter?

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Facebook Takes a Big Hit

 

For Facebook, the fake news, privacy violations, and stolen data came home to roost Wednesday night.

In a conference call after the market closed, the company said it expected revenue growth—Facebook’s be-all and end-all—to actually decrease in the second half of the year.

And not by a little. Chief Financial Officer David Wehner told analysts revenue growth would decelerate “by high-single-digit percentages from prior quarters” in the third and fourth quarters.

That doesn’t mean revenue is going to decline, just that its growth will fall by 7-9% each quarter, a substantial drop. The number of U.S. Facebook users has remained steady, a sign of maturity here.

Starting Wednesday evening, Wall Street went nuts. By Thursday’s close,   the stock had fallen almost 19%, erasing $120 billion in market capitalization, the biggest one-day decline for a single stock ever.

The Nasdaq Composite lost 1% on the day and the S&P 500 fell by 0.3%, but the Dow Jones Industrial Average, which doesn’t include Facebook or the other FAANG stocks (Apple, Amazon, Netflix, or Google’s parent Alphabet), actually posted its third straight gain, closing at its highest level since late February.

On Friday morning the Nasdaq fell again, thanks to Twitter’s 16% share price slide.

So, what does Facebook’s fall mean to the other FAANGs and the market as a whole?

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The Bull Is Living on Borrowed Time

 

If stock prices continue to rise, as they have for the last couple of weeks, then some time within the next month or so this bull market will become the longest since World War II.

That’s right: This most unloved of all bulls may last longer than the 1990s stock bubble, which went from irrational exuberance to dotcom euphoria before crashing back down to earth.

Before Thursday’s modest sell-off, the S&P 500 index was less than 60 points below its all-time closing high of 2872.87, set January 26th. The Dow Jones Industrial Average was a more sizable 1,400 points from its late January peak. The Nasdaq Composite index actually hit its all-time high on Tuesday. All three major indices have bounced back nicely from their double-bottom lows in early February and early April.

We at GoldenEgg Investing® always thought the late January-early February sell-off was a correction, not the beginning of a new bear. The fundamentals—economic growth and earnings—are just too good to be derailed  by anything less than a recession, full-blown trade war or actual war, all of which are possible, but not likely just yet.

But if the market manages to top its late January all-time high and keeps moving higher, it will face a couple of big barriers to further advancement.

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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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