The market gyrations continued Wednesday, although the Dow Jones Industrial Average spent a lot more time in the plus column than in any of the previous three sessions; they still closed down on the day, dragged more by tough sledding in technology than interest rate concerns. To be sure, yields popped after the Senate came to an agreement on a two-year spending bill that blows the top off caps designed to enforce some semblance of economic discipline.
This agreement comes in light of the nation’s $20.2 trillion in total public debt, which doubled since the third quarter of 2008.
That surge has resulted in public debt now at 104% of the Gross Domestic Product (GDP).
The market probably was more unnerved by the fact that the GOP leadership is fine with removing sequester restrains.
Leader McConnell tweeted:
"?For the first time in years, our military will have the resources needed to keep us safe. This funding will help serve #Veterans who have bravely served, & it will ensure efforts such as disaster relief, infrastructure, and build on our fight against opioid abuse & drug addiction."
Paul Ryan tweeted:
?1) Re-builds our military
2) Provides long-delayed disaster relief resources
3) Breaks defense/non-defense spending parity
4) Directs domestic funds toward Republican priorities
5) Repeals parts of Obamacare
What Else is Eating Wall Street?
Donald J. Trump commented:
In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!
Rationalization or (real) Reasons?
Over the last two weeks, an assortment of narratives has popped up to justify a stock market correction:
- The Dollar is too weak
- Wages are climbing too fast
- Jay Powell is an unknown
The dollar has been edging lower, but the notion it’s too low or that there aren’t benefits to investors is folly. In a competitive global economy where America already faces uneven hurdles in the form of tariffs and local runs, pricing matters. Moreover, many of the biggest stocks that have led the broad market are growing faster outside the United States.
On wages, the 2.9% year-to-year spike in private sector wages triggered talk of inflation and impending doom from too much good news – again, in the real world, this is folly. As the chart below illustrates the pace of year-to-year wage increases, we have been in a long-term decline and we aren’t even at Pre-Recession levels of improvement. I think it would be crazy and very unfair for the Fed to snuff out this green shoot this soon.
Speaking of the Fed, when did Jay Powell become an unknown? Most Fed watchers have regarded Powell as a dovish-centrist or an outright dove second to Janet Yellen over the years. He doesn’t rock the boat, having voted in lock-step with the last two chairmen. Powell has been with the Fed since February 2012, and before then, The Carlyle Group. This is the man that will roil the stock market? I think not.
Meanwhile, economic optimism as measured by Investor’s Business Daily (IBD) has climbed to its highest level since October 2004. The poll (taken January 25th to February 2nd) seems to also echo political leaning, but all geographic areas see expanding economic optimism:
- Rural: 65.8
- Suburbs: 54.5
- City Dwellers: 51.5
I suspect economic and consumer optimism numbers will retest recent highs as benefits from tax benefits continue to pour in.
Ronna McDaniel tweeted:
?Treasury Department states 90% of American workers will experience an increase in take home pay under the Tax Cuts and Jobs Act.
Then there was the latest company to share the wealth from Trump Tax Reform with its employees.
"As a result of changes in U.S. tax law," Chipotle's (CMG) 71,000 employees will receive:
• Accelerated Training Programs
• Cash & Stock Bonuses up to $1,000
• Expanded Parental Leave
• Life Insurance and Short-Term Disability
Technology’s Big Test
The S&P Technology sector took it on the chin as semiconductor stocks followed Microchip Technology (MCHP), which plunged on earnings disappointment. Names that popped the day before Micron Technology (MU) and Skyworks Solutions gave up large portions of their Tuesday gains. It’s been a long time since the Street has been worried about chips; historically, when the wheels come off these stocks, it’s ugly for much of technology.
On that note, I didn’t like the action in Apple (AAPL), which has shown resolve this week, but it’s still in correction territory and vulnerable.
Technology has been critical to the market rally. While there have been periods of rotation into other areas such as financials, which edged higher yesterday, the fact is this market rally has become addicted to big tech leading the way.
Futures have been all over the place this morning, but stocks are coming back with an unlikely leader in Twitter (think anyone will give President Trump any credit for the stock’s meteoric rebound?). The talking heads aren’t done trying to shake out this market, but I continue to say look at the underlying fundamentals and block out the noise.
On that note, it is intriguing to see Twitter and Snap have monster weeks as money has rotated out of some of the heretofore stronger tech names. That suggest money still wants to go to work and will leap towards perceived value, especially high Beta names. I’m champing at the bit and eager to be more aggressive, but we must allow this shakeup to run its course.
But the plan is to take advantage of this and buy great stocks on weakness.