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.
Gross domestic product (GDP), the official scorecard for the economy, grew at a 1.9% annual pace in the third quarter, in the first estimate. The four week average of new jobless claims slipped by 500 to 214,750, a low number. The U.S. created 128,000 new jobs in October, but the unemployment rate edged up to 3.6% from 3.5% (this can happen if more people enter the workforce, than get new jobs). The ISM purchasing manufacturing index came in at 48.3% last month, which showed the sector continued to contract in October, the third straight month of slowdown amid global trade uncertainties (bad news).
We’ve seen a slowdown in GDP for the last 4 quarters, from the 3% rate in 2018 (first year of the tax cuts), to the low 2% range in 2019. We were told that the tax cuts would raise GDP to the range of +3 – 4% economic growth, especially coupled with the deregulation the Trump administration was pushing. The deregulation involved eliminating rules on financial institutions that were put in place after the financial crisis in 2008, and relaxing environmental protections to reduce cost for energy companies. Two questions arise, 1) did the tax cut and deregulation produce the growth and jobs they promised, and 2) did they come with any negatives?
Question 1 – When the tax cuts were passed many economists did not believe the administration, that growth would accelerate to 4% on a long term basis. Most felt the tax cut would only produce a short term “sugar high” in the economy for a year or two, and I thought the same thing because that is what I have observed over the last 5 decades (I’m older, but have only been an observer as an adult). With the GDP running in the low 2% range currently, it appears the economists who were the doubters will be correct, and the administration lied to the people. Corporations and the wealthy have been the biggest beneficiaries of the tax cuts, but when running, Trump said the tax cuts would be focused on the middle class, which did not occur.
One could say the trade war is responsible for the economy returning to the long term growth rate around 2%, and it is not a failure of the tax cuts to spur growth. An economy is a very complex set of interactions, and while it is undeniable that the trade war has slowed growth somewhat, there is no current way to determine how much of the slowdown is attributable to the trade war and how much to the tax cuts losing their impact. All I know for sure is that despite the tax cuts and deregulation, the economy is not on pace to deliver 3 – 4% growth for the foreseeable future.
Question 2 – So, did the tax cuts and deregulation come with any negatives? The effects of increased pollution are difficult to assess on quality of life and I will not attempt that, but you could do some research. The effect of the tax cuts on the deficit have been substantially negative, with the annual deficit ballooning to one trillion dollars in the fiscal year just ended Sept. 30, bringing to total national debt up to $23 trillion, a shame in good economic times. The final Obama deficit was about $500 billion, so Trump has doubled the deficit in 3 years during good economic times. Some republicans have said the deficit no longer matters (google “dick cheney deficits don’t matter), but like so many things that can hit a tipping point, Jeff Gundlach has said about the deficits, “they don’t matter, until they do”. I am in the Gundlach camp on that.
The Fed met last week and cut the Fed Funds rate, as expected:
Oct. 30, 2019 – The Federal Reserve cut its benchmark interest rate for the third straight meeting and signaled it may pause before further changes to monetary policy to see whether these easing steps are enough to sustain the economic expansion.
At the policy meeting on Wednesday, officials said they would lower the federal-funds target rate by a quarter percentage point, to between 1.5% and 1.75%.
In taking this action, the Fed cited “the implications of global developments for the economic outlook as well as muted inflation pressures.” In essence, these rate cuts are insurance against a recession.
Fed Chairman Jerome Powell said policy would remain steady as long as “incoming information about the economy was broadly consistent” with the Fed’s forecast of moderate economy growth, a strong labor market and inflation near the 2% target.
“We believe monetary policy is in a good place to achieve these outcomes,” Powell said. “We see the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”
Another pressure on the Fed to keep interest rates low, and nobody talks about this, is the $23 trillion dollars in debt that that government is now carrying, which is now growing at one trillion dollars per year and projected to increase each year! The budget item “Interest on the Debt” is already huge, and if interest rates increase, as portions of that debt mature and get refinanced at higher rates, the federal deficit will grow because of the cost to carry the debt. That is not the Fed’s responsibility, it is the responsibility of congress and the president to operate sound fiscal policy, which they are failing to do. Nobody cares about the deficit, until a problem comes along, and we can’t spend our way out of it because the total debt is already so large. That would be very bad for the stock market.
The market was up 1% this week to an all-time record high of 3067.
Technically the chart looks good, but this swing in the market is very near to overbought, and this year when the market has set new highs it has not pushed much higher from there. RSI has almost reached overbought at 68 (70 is overbought), and is in a nice rising pattern. Momentum shown by MACD at the bottom of the chart is rising and that’s positive for the short term. The price action is clearly positive.
The nature of a bull market is that when it gets overbought, it can get more overbought and remain overbought for weeks or months before a correction occurs. That tends to happen earlier in bull market cycles. This bull market is 10 years old, and recently when it has gotten overbought, that has not persisted for weeks or months. That makes me cautious.
What am I doing? Fortunately I did my buying in late Sept. and early Oct. and last week I did my first “sell into strength”. I sold my SPY and kept my individual stocks, since most of them have covered call options sold against them, expiring 11/15. Right now, it looks like my BMY will be called.
They say “buy low and sell high” and it’s not that easy to do. You have to get into a reverse psychology from the majority of investors who get excited when everything looks good, and they tend to buy into overbought markets and suffer from the following correction. Then they get scared in the following correction when it is a big one and they sell when the market is low. That is the opposite of what the professionals do. The market is high, so I have started selling into that strength, then I’ll wait for a correction and try to buy back in when the market is lower. Nobody can pick the absolute top of the market, so when you begin selling into strength, the market will probably go a little higher. That can be frustrating to see the stocks you just sold continue higher. But, when the correction comes and you can buy back in at a lower price than where you sold out, it feels pretty good then.
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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