I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market. You can always scroll down a few weeks and find the latest “Long Term” update.
If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so. The more often you google it and hit the link, the higher it will show in your results.
Existing home sales slipped 1.7% in June, reflecting ongoing weakness in the U.S. housing market despite a sharp drop in mortgage rates. Existing-homes sold at a 5.27 million annual pace last month, down from 5.36 million in May. The annual sales pace in June for new single-family homes in the U.S. rose 7% last month to 646,000, for the first gain in three months. The monthly average of initial claims for unemployment declined by a small amount of 5,750 to 213,000. Durable-goods orders rose 2% last month. The first estimate of Q2 GDP was 2.1%, down from 3.1% in Q1.
It was a mixed week of data. I don’t see a reason for a big selloff, nor for the stock market to rocket up.
Next week, the US and China will hold their first trade talks in 3 months, following the meeting between Trump and Xi at the G20 conference in June.
There is a global economic slowdown going on and most believe this was started by the trade war Trump started, first with steel tariffs that hit Canada and Mexico along with China, then by the tariffs directly placed on Chinese goods coming into the US. You can see this in the ragged economic statistics being reported by the government each week, and in the slowdown in the quarterly GDP reports starting in 2018 Q4.
Rupert Thompson, head of research at Kingswood, an investment manager, said:
The ECB left policy unchanged at today’s meeting and all but committed itself to easing at its meeting in September. Draghi emphasised that the risks to growth remain on the downside, inflation remains muted and the 2% inflation target is symmetric – implying that an overshoot would be tolerated to compensate for past undershooting.
There are many interesting observations on the ECB statement. They basically announced a rate cut for September. Their economies in Europe are slowing. Inflation is still low, below their 2% target.
Today I’ll talk about the lack of inflation. The old theory of inflation is that it came from “loose money policy” of too low interest rates and growing the money supply much faster than the GDP was growing. Over the last decade we have proven that false, since we’ve had historically low interest rates and historically high deficits, yet inflation does not take off.
If we go back to the high inflation 1970’s, what was true about the economy that is not true today? It is said that the US standard of living adjusted for inflation peaked in the 1970’s. Labor unions were strong, wages were at an inflation adjusted peak, and American consumers had a good amount of “discretionary income”. The women’s movement brought the advent of “two income families” and life was good. Then the pressure began to mount against the US. We say the entry of Japanese car makers into the US and they took significant market share from the “big 4” (GM, Ford, Chrysler, American Motors – who can forget the “Gremlin”?). American Motors died, with its popular Jeep division bought by Chrysler. Japan took over consumer electronics and the market for high end optics. CEO’s could not negotiate lower wages with the unions, so they began to close factories and move production offshore. Union membership is 80% lower today than in its heyday. Inflation marched on in the last 40 years, but wages did not keep up and today even two income families struggle to raise a family and send the kids to college without incurring significant debt. Woe unto the family that is not lucky and incurs a serious illness. Finances today are usually shaky, and much of that comes from a multi-decade effort to break the power of the labor unions and bring down wages. In the process, Americans have lost much of their “discretionary income”. When you lose your discretionary income you don’t run out and buy things unless you absolutely NEED them, not just because you WANT them. With less “buy pressure” in the economy, companies have lost pricing power. If companies raise prices, they usually lose customers. Of course the internet has also been a force against inflation enabling customers to shop nationally for the best price, helped by companies like Amazon.
The overall nature of the economy now is such that where the Fed used to think they could stimulate a bit of inflation by lowering interest rates, they see that they cannot. Lowering interest rates can stimulate inflation if people have enough discretionary income to consume at a higher rate, but if the consumer does not feel they can consume at a higher rate because they don’t have enough discretionary income, lowering the interest rate will not do any good. To an extent, the central bankers are losing control of the economy and the nature of the economy has changed enough in our lifetimes that merely adjusting the Fed Funds rate up or down a little no longer has a predictable effect on the economy. That should give us all a pause.
The S&P posted a gain of 1.4% this week, on a good week for corporate profits, and closing at an all-time high. Most companies are beating the lowered estimates that are designed so the companies can beat them. What bothers me is that the talking heads on TV don’t give you the whole picture, and they don’t talk about this fact reported from Factset:
Earnings Growth: For Q2 2019, the blended earnings decline for the S&P 500 is -1.9%. If -1.9% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016.
Things are not as rosy as they appear to be on CNBC.
On to the technicals, which are good. RSI at the top of the chart is in high neutral at 63. MACD at the bottom of the chart is trending down slightly showing the market is losing momentum, a short term negative. Price action is positive, but the rise in price is slow, hence the declining MACD.
The bottom line is it looks like the market wants to go up for now, buying the idea that beating a lowered earnings estimate is a good thing, even if it is lower than last year’s earnings. I don’t expect that to change while earnings are coming in, but August and Sept. are dangerous months.
What am I doing? I continued to buy in slowly. My buys are much smaller than in the last few years. I tend to favor dividend payers like CSCO, INTC, MRK. I’ve made daily small buys in SPY that are profitable so far. I had bought a little GOOG and enjoyed the $100 per share pop in that stock and promptly sold out at 1260, and will look for another buying opportunity.
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You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window. The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text. To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size. If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.
Rich Comeau, Rich Investing