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.
Orders for durable goods sank 2% in November, the biggest decline since May (what happens to durable goods orders eventually happens to sales). New home sales increased 1.3% on a monthly basis in November to a seasonally-adjusted annual rate of 719,000.
The stock market is hitting record highs, but the economy is uneven and sluggish.
Let’s take a look at what is going on in the “repo market” and the Fed’s response, which has been to add liquidity to the banking system.
According to Bankrate’s December Federal Reserve Forecast survey, experts noted in their written responses that they’re continuing to watch the repo market mess because it has a great deal of impact on the Fed right now.
“Should market rates again rise above the Fed’s target range upper limit, it will mean that the Fed’s existing strategy hasn’t proven capable of making its operating system function as it is supposed to,” says George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute.
Some experts have already outlined what that might look like, with the most drastic call coming from Credit Suisse. Zoltan Pozsar, Credit Suissee’s managing director for investment strategy and research, suggested that the Fed wouldn’t be able to fix the repo market turmoil simply by injecting cash into the marketplace. Instead, they’d need to reinstate another round of “QE” because reserves are still insufficient, he said.
Of course, that hasn’t been confirmed, while other Fed watchers are predicting that the Fed will take a different, less-drastic step. One such alternative is the creation of an even-more wonky financing program known as a “standing repo facility.” This facility would likely be a permanent program at the Fed, allowing participants to exchange bonds for cash at a set interest rate.
Many details still need to be hammered out — such as who would be eligible — but it’s something that “many” Fed participants see as needed, according to records of the Fed’s October meeting.
What next steps should consumers take?
All of this volatility and uncertainty underscores the importance of building an emergency savings fund, Hamrick says. Investors, meanwhile, should brace for more market choppiness as the Fed figures out this process.
“Some of the volatility that we saw in financial markets toward the end of 2018 is an indication of what can go wrong if the Fed makes a policy mistake,” Hamrick says. “The worst of that may be behind. But whether anticipating an economic slowdown or market volatility, think about your long-term plans, including retirement and emergency savings.”
“Consumers, investors, savers and borrowers should think about this (quantitative easing) as one of the two main tools in the central bank’s toolbox to help adjust the strength of the U.S. economy,” Hamrick says. “It remains to be seen how the Fed will learn how best to employ it and whether there are unintended negative consequences from having invented and deployed it.”
From 2000 – 2002 (the dot com bust) we had three consecutive down years in the stock market after the terrific gains in the 1990’s, that took the stock market down 50%. Then in 2008 we had a 50% decline in the S&P is just over one year following the mortgage backed securities bust.
The big question remains, is there another “bust” out there, a really big problem? If there is, and I believe that there is another crisis out there, it will start in the bond market and the crisis will be one of DEBT. Can the US carry $23 trillion of total debt, and add to it at a rate of over $1 trillion per year when the economy is in good shape, and do that over a long period of time, without a serious detrimental effect on the economy? I think the answer is no. Why is there insufficient liquidity in the banking system to operate the repo market? Could it be that the US trillion dollar annual deficit is sucking all the liquidity out of the world to fund its deficit? Is that why the Fed is expanding its balance sheet again like it did in the 2008 financial crisis, because the rest of the world lacks the cash to finance the US deficit? If that is the case, eventually interest rates will rise to attract more cash to the bond market. That would have a slowing effect on the US economy. Think about a slowing economy in a rising rate environment, that’s not good. What are the unintended negative consequences of having invented quantitative easing and having deployed it to finance huge on-going US deficits? Once you have gone down that road, can you get off?
The market was up another percent this week, closing at another record high.
Technically we are in the same shape as last week. The market is strongly overbought with the RSI at the top of the chart up at 79. Momentum shown by MACD at the bottom of the chart is still rising, a positive. The price action is still rising. That is all positive, but the strongly overbought reading is a caution sign, and the price is extended far above the 50-day moving average (blue line). A reversion to the mean (correction) can come at any time.
The economic statistics do not warrant this type of record setting gains in the stock market. For all of Trump’s complaints about the Obama 2% GDP economy, that is what we have now as 2019 will go down as a 2% GDP year. Earnings for 2019 were flat compared to last year. With flat earnings and a substantial gain in the S&P, the market valuation has moved from neutral to moderately overvalued. Color me cautious.
What did I do last week? Not much, but as I had sold most of my SPY, and my call options on stocks that I held had expired, I began to sell overvalued stocks that no longer had call options covering them, BIIB for one. Then I sold a BIIB Jan 280 Put to buy it back if it goes down in a correction. I have a lowball buy order to pick up CTL on a pullback, for the dividend and hopefully a pop on a market rebound. The little SPY that I have left has a trailing stop loss percent order under it, close at 1% down.
If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.
Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.
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