US stocks have had an indecisive night. The Dow opened at a new record high before dipping back a little. The S&P 500 hasn’t set new record highs but is off its lows. Likewise, bonds are not sure. US 10’s are higher certainly at 2.24%, but that’s lower than the 2.30% overnight high.
It’s all been a bit of a gamble so far as traders bet what a Trump presidency means. But there are signs steam may be coming out of the initial moves.
Not the US dollar though it seems, which benefits not only from Trump but a refocus on the Fed and divergent central bank policy. In dollar index terms it’s up through 100 and looking strong against the Euro, Yen and emerging market currencies. The Aussie, Kiwi and CAD are however bucking that trend by some margin.
Elsewhere oil fell back, gold is lower at $1218, copper was a little stronger and iron ore dropped back overnight.
The washup is that SPI traders have knocked 16 points of the December contract suggesting the ASX200 will open on the back foot after yesterday’s 25 point (heavily ex-dividend influenced) loss.
Here’s the scoreboard:
- Dow: 18863 +15 (+0.08%)
- S&P 500: 2165 0 (0.0%)
- SPI 200 Futures (December): 5,334 -16 (-0.3%)
- AUDUSD: 0.7542 +0.0004 (+0.05%)
The top stories
1. No one seems to want to say this, so I will – this Trump Triumph rally in stocks is stupid.
Legendary value investor and Buffett mentor Benjamin Graham said once: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”.
That’s just a neat way of saying investor emotions, sentiment, and reactions drive markets in the short run but, over time, valuation matters.
So far we’ve seen stocks roar higher as traders bet who would win and lose – pharmas and banks in particular. That’s driven the Dow to record highs. But the Dow is not the market. It is 30 stocks. The S&P is closer to the market with its 500 stocks and it did not hit new record highs. We’ve seen bonds sold aggressively, emerging market currencies get creamed, while gold and oil collapsed again. When you look at that summary it’s clear in these divergent moves there is as much fear in the post-election market as there is hope.
So to me it’s a tenuous rally in stocks which has pulled forward a lot of the potential benefits from Trump’s policies being put into action. But there is much to come before January 20 including an Italian referendum and a Fed rate decision. So to butcher another metaphor, it feels like markets have maybe put the cart before the horse. That’s a risk.
2. The bond market vigilantes are back with all guns blazing. I’m full of quotes this morning and another of my favourites is the one about bond markets attributed to James Carville who was a Clinton administration advisor back in 1993. He said:
I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.
So it’s no surprise the stock rally has kind of pulled up when bond traders went on a rampage of selling, driving US 10’s all the way to 2.30% last night before rallying. That 2.30% level is where 10’s were last December after the Fed had hiked and promised 4 more in 2016. Of course, we only got one. If Trump really is reflationary, bonds and Fed rates have to go higher.
That’s something Wall Street “Bond God” Jeff Gundlach thinks will happen over time as he sees strong nominal growth eventually driving US 10’s to 6% on a 5-year time frame.
3. It’s the rise in bonds which really threatens stocks valuations. Remember back in June when the Fed gave the results of its modelling of stock valuations and said on a PE basis they were at historical extremes and it was only low rates that gave them any value? (If you don’t, they did.)
So I offer this article from Bloomberg highlighting that the bond rout eats into the one remaining valuation case for stocks.
Lest I only put forward the bear case for stocks it’s worth noting Jeffrey Kleintop, chief global investment strategist at Schwab, told Bloomberg that “historically, over 5 percent on the 10-year is where rising interest rates become an impediment to valuations. Below that it’s actually correlated to higher stock prices. Rising interest rates means better economic activity, better inflation and are good for stocks”.
4. Here is another potential bull case for stocks – the 18-month recession at the biggest businesses in America just ended. The excellent Bob Bryan reports that since the second quarter of 2015, S&P 500 earnings reports have shown a decline in profits — year-over-year. A decline for two consecutive quarters indicates an earnings recession. Based on the companies that have reported so far this quarter (90% of S&P), S&P earnings will be up 2.75% from the prior year’s third quarter according to John Stoltzfus, Chief Investment Strategist at Oppenheimer.
5. Oil is down again but the fiscal imperative for an OPEC/non-OPEC deal on production remains. Oil fell to $US42.18 in WTI terms overnight before recovering back to $US44. The big issue is that traders are betting the geopolitics of a production cut are now harder and also that the recent surge in production shows a lack of will to get a deal done at the November 30 meeting.
I’m not convinced personally and note that Saudi Energy Minister Khalid al-Falih again reiterated that it is imperative for OPEC to crystallise the agreement reached in Algeria recently. It’s the fiscal imperative – OPEC nations and non-OPEC nations are kind of broke – which is the strongest suggestion a deal could yet be done.
So it’s also worth noting that Russia’s recession still isn’t over. Sure it’s the smallest drop for a couple of years but the economy is still going backwards.
6. 4 themes from the Reagan years that Citi thinks will play out under Trump. This is my favourite BI article for the past 24 hours. Possibly because of confirmation bias – I agree with the analysis – but also because it neatly hit the highlights.
You should read the full post but those themes are. Stronger US dollar, Fiscal stimulus, Bond sell-off, and Equities jump, but then fall longer-term.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Bluescope shareholders got the daily double last Thursday. The first leg came when management provided guidance for earnings before interest and tax to be at least $510m in the first half of the current financial year. The second leg was markets acting on the realisation that the Trump Administration will mean a huge boost for US infrastructure spending. Good news for Bluescope which owns a US steel producer (North Star Bluescope Steel).
The stock is up 22% in 3 days. The next chart test will be whether it can signal the end of the latest major correction by moving past the August high at $9.25. Given the kind of analyst upgrades now taking place, this looks a real possibility.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC