The most important message from Jerome Powell yesterday, as he answered an array of questions from U.S. Senators, was the lessons from Europe and Japan who got behind the curve, allowing inflation under 2% for too long. It has allowed persistent low inflationary pressure to become a “self-fulfilling thing.”
This statement is the biggest reason the Fed under Powell will cut rates, and there will be more activity. Therefore they want investors to get used to the idea that unconventional tools (read: quantitative easing) could be conventional tools, giving them room to cut rates this month and later in the year.
It’s going to take more than one Consumer Price Index (CPI) report to come in slightly hotter than estimates to erase this concern. I continue to believe this is Powell’s biggest concern, and he’s lucky he can hide behind tariff concerns and Congress’ surprising animosity and worry over Facebook’s Libra cryptocurrency.
Some Rough Spots
I’m not surprised the market, which sagged mid-session on Thursday, surged into the close and pushed the Dow Jones Industrial Average to the high of the session. Interestingly, while the broad market was higher with every S&P sector other than Real Estate, market breadth was less inspiring.
The message of the session is clear as we head into earnings season: sellers are going to be a lot more emotional than buyers. Hence, down volume will be more than up for the NYSE and the NASDAQ Composite.
NYSE
- Advancers: 1,470, Decliners: 1,454
- New Highs: 182, New Lows: 42
- Up Volume: 1.43 Billion, Down Volume: 1.65 billion
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NASDAQ
- Advancers: 1,368, Decliners: 1,713
- New Highs: 124, New Lows: 55
- Up Volume: 852.9 Million, Down Volume: 1.06 billion
New Leadership
Speaking of earnings and corporate data, retailers got a boost from Costco (COST), which saw solid comp-store sales. The consumer is still the boss, as household economic circumstances continue to improve. Brick-and-mortar names were roughed up big time last earnings season; perhaps this time, expectations are depressed enough for the best names to rebound.
Too Exuberant?
The American Association of Individual Investors (AAll) Survey has results for the week ending on 7/10/2019. The data represents what direction members feel the stock market will be in the next 6 months. Individuals are still significantly below historical averages and nowhere near levels that would be contrarian “sell” signals.
BULLISH 33.6%
- HISTORICAL AVERAGE: 38.5%
- +0.5 Percentage point change from last week
NEUTRAL 38.9%
- HISTORICAL AVERAGE: 31.0%
- +4.4 Percentage point change from last week
BEARISH 27.5%
- HISTORICAL AVERAGE: 30.5%
- -4.9 Percentage point change from last week
Summation
Just because the market is at all-time highs doesn’t mean there is excessive exuberance or even a dollop of giddiness. This rally has been hated for a long time, going back to its origin in March 2009. More recently, the fact President Trump likes to focus on the surge in the market under his presidency has turned some from not loving the rally to rooting against it.
The average investor is still indifferent about the market, and that’s good news because many will blink at some point, adding fuel at higher levels.
Also, keep in mind that being at record highs doesn’t make the market expensive, using the most popular traditional valuation metrics, such as price-to-earnings (P/E) ratio and price-to-sales (P/S) ratio. This market is far from levels normally associated with market tops and euphoria.
Portfolio Approach
Communication Services | Consumer Discretionary | Consumer Staples |
1 | 4 | 1 |
Energy | Financials | Healthcare |
1 | 2 | 1 |
Industrial | Materials | Real Estate |
2 | 3 | 1 |
Technology | Utilities | Cash |
3 | 0 | 1 |
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