The market displayed a fair amount of grit yesterday. The Dow Jones Industrial Average erased a triple digit decline with a triple-digit move higher, even as it drifted into the close. Strong economic trends continue to justify the stealth rally since the March 23 low, but it also adds to general anxieties about how much longer it can last and how high can it go.
I think these trends, especially increases in capital expenditures and other business investments, point to a very robust economic backdrop well into next year and probably much farther out.
Small Business Optimism
The NFIB's Small Business Optimism Index reached an all-time high in August coming in above consensus at 108.8. Key Highlights include:
- Increase Employment +3 percentage points to 26%
- Increase Capital Outlays +3 percentage points to 33%
- Increase Inventories +6 percentage points to 10%
Job openings in July surged to an all-time high of 6.94 million. Although this is more backward-looking than most economic reports, data points suggest continued momentum to the greatest wave of job openings ever seen in America.
The message of the session yesterday saw a return of big tech, which influenced several sectors including: communications services, consumer discretionary and technology. The energy sector moved with a big pop in West Texas Intermediate, which moved higher in part to Hurricane Florence.
Yes. I still love Permian Basin ideas despite recent infrastructure issues, but I won’t pound the table until it gets above $74.00 a barrel.
Checking Under the Hood
What bothered me yesterday was market breadth. I talk about this a lot and its essentially different measures of internal demand and strength.
There were barely more advancing names on the NYSE than decliners, and there were more decliners on the NASDAQ than advancers. This was the same case with up to down volume. We saw enough rotation in late July and early August when big tech came under fire, but we haven’t seen the market tested on how it will react when all those names finally stall, and eventually correct.
There is enough cash sloshing around in the market and on the sidelines to see other sectors step up, but the question and angst goes beyond value propositions.
There were significantly more new highs versus new lows on both exchanges.
This brings me to a question more people have been asking- what does it mean that only a handful of stocks seem to be carrying the market? Right now, 20% of the S&P 500 is in bear market territory, which underscores several points including:
- The impact of passive investing and everyone buying winners, which only pushes up the winners.
- The lack of opportunistic buying shows even deep-pocketed investors would rather err on side of chasing performance.
- Heightened concerns about what happens when the big tech names finally turn lower substantially.
Speaking of major downside moves, China stocks continue to take it on the chin, even as Wall Street experts wave the flag of surrender in the trade tiff. The Invesco China Tech Index is down 25% year to date, as its top holdings Tencent, Alibaba, Baidu and Net Ease are all at 52-week lows.
China’s New Allies?
Currently, there is a bigger push from American companies to get the administration to stop its fight for fair trade with China. I find it amazing that so many big businesses are willing to go out and support the unfair trade practices of China, while ignoring the mounting human rights abuses.
China’s crackdown on religion is on the rise from ransacking and intimidating Christian churches to imprisoning one million Muslims. Moreover, the government has begun employing surveillance cameras, big data and artificial intelligence to monitor Muslims to determine if they might have an inclination of independent thought.
We used to care about this kind of persecution.
So, China is spreading around a lot of money, and the mainstream media’s hatred for President Trump supersedes their concern for global citizens being punished for their religion. Of course, there are companies that benefit from child labor and the kind of working conditions that otherwise would be deemed unacceptable.
I get where businesses want access to 1.4 billion people, but these Faustian deals are going to come back to haunt them. America should be dealing from strength rather than surrender.
By the way, many of the big hitters on Wall Street are urging investors to buy emerging markets on weakness rather than American stocks currently under duress. I say, stick with great American companies, and when they go on sale, like Boeing, you should be opportunistic.
Boeing updated its twenty-year outlook for its commercial airplane demand, which increased 4.2% powered by a 6.2% increase in China demand.
2018 – 2037
2018 - 2037
2018 - 2037
The market looks to begin trading with the same kind of trepidation seen in the last couple of weeks. News on Canada trade talks might help, but the week after the jobs report always sees this kind of anti-climactic inaction.
The bias is still to the upside, which underscores a potential volcano of buying ready to be unleashed. That should take out key resistance points, which in turn lures even more money off the sidelines. For the moment, it’s just smoldering.