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.
New home sales in the U.S. decreased 0.7% on a monthly basis in October to a seasonally-adjusted annual rate of 733,000, however the figure for September was revised up to 738,000 from 701,000 so new home sales still look good. The 4-week average of new jobless claims fell by 1,500 to 219,750, still in the low range. The second estimate of US Q3 GDP came in at 2.1%, up from the initial estimate of 1.9%. Orders for durable goods climbed 0.6% last month, but orders for military goods accounted for .5% of the increase while the civilian economy came in about flat. Consumer spending increased 0.3% in October, the eighth monthly increase in a row.
Housing is a bright spot for the economy due to the Fed interest rate cuts, but elsewhere the US economy looks like the same slow growth economy we had for much of the last decade. That is not particularly bad, in fact when the government over-stimulates the economy it can create bubbles that pop and hurt, like the 2008 mortgage crisis. There is actually a lot that can be said for slow steady sustainable growth.
I will relate what I heard in an interview with a former high ranking defense department consultant, which echo’s some of my thinking. I have said I don’t think we’ll see another major world war like WW II, because the killing and destructive power makes it so that even if you win, the cost of victory will outweigh the objective you achieve. Regional conflicts will continue however.
The consultant pointed out that the major US policy over the last 40 years with China, starting under Ronald Reagan in the early 1980’s, was to open trade and engagement with China and as their economy progressed, if they wanted to continue the progress we would have some leverage to bring them into the world economy and play by the post WW II US dominated set of rules. This worked for 30 years, but China played by their own rules, stealing technology and closing much of their marketplace to US companies unless they had a Chinese partner. Beginning 10 years ago, the impact of unfair trade practices began to significantly impact the US economy and China was growing in influence throughout Asia and the Pacific Rim.
There is now a US consensus that the 30 year experiment to bring China into the world economy playing by largely western democratic rules, has FAILED. Now the US has a major rival, while we derive only a small benefit. China’s expanding influence in the Pacific region threatens US influence there. The US has decided to challenge China, and remove some of the benefits of cooperating in the western economy. This is not clearly stated in the current trade negotiations, so each side is struggling to find out what the other sides’ true intentions are, and that is slowing the negotiations.
5G communications is a prime example, and China was hoping that Huawei would supply the chips to the US and the rest of the world and there would be one standard controlled by China. The US has raised concerns about whether China could eavesdrop on IP based calls and email and will not allow US companies to use Huawei chips. The US is further pushing our European partners to abandon use of Huawei chips and play in the US scheme. This is risky for the US since we have been antagonizing our European partners by pulling out of the Paris climate accord and the Iran nuclear deal, without consulting our European partners. What partners they say? The US has muddied the picture.
So, we are in the middle of redefining the relationship between the US and China. The US and Russia had a military cold war for 50 years that has ended. Now the US has opened an economic cold war with China. If China wants to continue to ignore western business practices, no longer can they accrue so many advantages for their economy. China and the US have to figure out how each will fare under a new set of rules, and what set of rules gives it the greatest advantages in the long run.
The problem is easy to state, but the solution is hard to divine. I am sure there are several 500 page analyses available on this already, on each side.
The article below does not echo these ideas, but it is a useful discussion of the “cold war” from another perspective.
The market closed up 1% this week, on positive comments about the progress of the China trade talks.
Technically, the market looks pretty good, but it is overbought. But we are in a bull market and overbought bull markets can get more overbought. RSI at the top of the chart is at 70 which is technically overbought. Momentum shown by MACD at the bottom of the chart is moving sideways, so neutral right now. The price action is positive, continuing to rise, but it is bumping up against the top of the rising channel, so that raises the risk of a correction, although the positive tone of the market of late, since the Fed has cut rates 3 times, would seem to limit the size of a downdraft. Another small technical risk is that the price of the market is extended above the 50-day moving average to about the largest level in the last year, a point where the market will eventually have a correction to “revert to the mean”.
What are the risk factors for a larger drawdown?
- Failure to reach a substantive agreement with China on trade and tariffs.
- Earnings downgrade of the S&P 500, which is what cratered the market last fall. Factset has downgraded both Q4 (to -1.4% on earnings vs. the prior year) and Q1 2020 (from +8% to +5%), while holding up earnings for calendar 2020 to +9% (how’s that going to happen? Second half miracle obviously).
There are risks out there, to this overbought moderately overvalued (see the monthly Long Term update) market.
What am I doing? Not much these days. I mentioned that I had bought a long term bond ETF called TLT a few weeks ago. Going into a Fed expected rate cut, I thought long term rates would also come down a bit, and if we got a stock market correction, many sell stocks and buy bonds temporarily. That worked well for a couple of weeks, I made 1.7% on the trade. It did not look like any larger correction was at hand, so I sold the TLT this week. I bypassed the opportunity to collect the coupon on 12/3, in order to sidestep the risk of the principle falling more than the coupon would be worth. I could be wrong on that, time will tell, but I know I made a relatively safe 1.7% in a month. I had a couple of stocks called today (11/29) at profits, so I continue to pare my stock holdings. I placed some low ball buy orders to buy back the stock I sold today, if the market pulls back from these record highs. They say, but low, sell high. We’ll get a correction someday.
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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