The Treasury secretary is learning how virtually every syllable out of his mouth is being parsed and traded upon. » Read More
Buybacks keep rolling along, but here is why they are no panacea for all of the market's problems. » Read More
The two underpinnings of this rally — the Trump Rally, and the Reflation Trade — are both very much intact. » Read More
Oil is likely to remain in the low $50s for the rest of the year. » Read More
Are the markets worried about a slowdown in the Trump Agenda?
Some are indeed worried about it, but the markets are keeping the faith—at least so far.
Greg Valliere at Horizon Investments summed up the concern this morning: "[O]ne of the reasons the stock market rallied in recent months was the prospect of action in Washington on these four major bills—and suddenly they seem bogged down."
He was referring to the core Trump Agenda of lowering taxes, reducing regulations, and enacting an infrastructure reform bill, and replacing Obamacare.
Regardless: the markets have shown no signs of losing faith that this agenda can get passed, at least not yet.
Consider that stocks rallied this morning as President Trump, meeting with retail CEOs at the White House, reiterated that he "will lower rates very, very substantially, including personal and business" rates.
While the president did not mention tax cuts during his press conference with Israeli Prime Minister Benjamin Netanyahu, the trading community is expecting that he will flesh out his tax cut plan during his address to Congress on Feb. 28. It's likely his team may leak details out ahead of that speech.
Another reason the markets are not falling apart is that it's not just about Trump. I noted yesterday that the rally has turned global. The global economy--and global earnings--are improving.
We also saw further evidence this morning that the U.S. economy was continuing to improve. Consumer prices--a gauge of inflation--and retail sales in January were both stronger than expected. Strong retail sales indicate the U.S. economy continues to improve. Higher consumer prices — which are up 2.5 percent year over year, the highest in almost 5 years — indicates that the so-called "reflation trade" is very much in place, a trade that is lifting prices on everything from commodities to finished goods, and lifting profits as well.
The focus on the breakout in U.S. stocks is overshadowing an equally important event: a global stock market breakout. While the U.S. is up roughly 3 percent for the year, the rest of the world is outperforming, including emerging markets, Japan and Europe — up 9 percent, 5 percent and nearly 5 percent year to date, respectively.
What's behind the outperformance? Consider:
What could keep the rally going? Upward revisions in earnings growth, for one, starting with the United States. Bank of America noted that while 2017 guidance from U.S. corporations has been typically tepid since they want to set the bar low, the commentary on conference calls has been far more optimistic — literally. The word "optimistic" was used on a record 51 percent of the calls BofA monitored this quarter, the highest since they began monitoring this data in 2003.
"This optimism could translate into future earnings revisions," BofA wrote.
The major indices opened at record highs yet again on Monday, with cyclicals like Financials, Industrials, and Materials all leading. The Dow Industrials have moved about 270 points or 1.3 percent since Thursday morning, when President Trump said he would have more news on a tax cut in the next few weeks. House Speaker Paul Ryan already said that no action would be forthcoming before spring at the earliest, but no matter. Just word that the president might have something soon is sending markets higher.
The S&P 500, the main index watched by professionals, topped $20 trillion in value for the first time this morning. The S&P 500 is the 500 largest stocks in the U.S., but there's about 4,000 companies that are actively traded. The Russell 3000, which is the largest 3,000 stocks that trade, has a market value of about $25 trillion. So the top 500 stocks have a value of about $20 trillion, and the remaining 2,500 have a value of only about $5 trillion more.
That tells you that the biggest stocks really are getting bigger.
Why is that? Partly, it is the triumph of indexing. The three largest ETFs that track the S&P 500—the SPDR S&P 500 (SPY), iShares Core S&P 500 (IVV), and Vanguard S&P 500 (VOO), collectively have about $358 billion in assets under management, about 14 percentof the $2.5 trillion in assets for the entire ETF industry. Because it's easy to push money into indexes, and the S&P 500 is the most well-known index, the big keep getting bigger.
After today, any lingering doubts about what moves the market—namely, talk of tax reform—should be laid to rest.
The S&P 500 Index moved almost 8 points in the hour after President Donald Trumpsaid he would have the outlines of a tax reform package in a couple weeks. In particular, bank stocks moved because bond yields rose.
The small-cap Russell 2000, which has been underperforming since mid-December, also rallied. Small companies would be among the biggest beneficiaries of a tax cut.
Never mind that House Speaker Paul Ryan indicated that Obamacare would be a priority, and that tax reform wouldn't come until the spring at the earliest.
"It's just the way the budget works that we won't be able to get the ability to write our tax reform bill until our spring budget passes, and then we write that through the summer," Ryan said last week. He added that an infrastructure package "comes out of our spring budget, as well."
Never mind all that! The president said we will have more on tax reform—very soon.
The most hotly debated issue on trading desks right now is the mini-rally in bonds and bond funds we have been seeing in the past few days. What's behind it?
Likely, not too much. At least not yet.
Here's what traders have focused on:
1). A modest uptick in prices in bonds and bond ETFs in the last several days, but particularly in Treasury ETFs. Other bond ETFs like iShares Investment Grade and iShares Core Aggregate, the largest bond ETF, have also seen modest price hikes. Volumes have not been particularly strong until Wednesday, when many bond ETFs saw heavy inflows.
2). Bond ETFs were also well-represented in January fund inflows. Not surprisingly, plain-vanilla stock ETFs like the Vanguard S&P 500 Index saw inflows, but surprisingly bond funds like Vanguard Intermediate Term Corporate, Vanguard Short-Term Bond and iShares Investment Grade Corporate all saw notable inflows.
What's going on? First, regarding the recent rally, the rise in prices has been pretty modest, and the volumes (other than Wednesday's) have been small. There has been no countervailing move in stocks. What fits with these facts? Seems to me that some modest short covering is the answer. We do know that traders heavily shorted bonds after the election and maintained those shorts. Modest covering could easily account for the price rise, and the fact that stocks have not reacted.
Second, it's perfectly reasonable to assume that some investors surveyed the landscape after the first of the year and came to a simple conclusion: Interest rates have already risen, but they are unlikely to go through the roof.
"My hunch is that there is no panic that 10-year yields are going to 4 percent anytime soon," said Dave Nadig, CEO of ETF.com. "There's also the added yield play. Investors can see that they are getting 70 basis points more yield than they were getting in October."
Wall Street traders have notoriously short attention spans, and it's showing in the latest round of whining, this time around the idea that the Donald Trump "reflation trade" is winding down.
It goes like this:
Here's a typical example of this kind of concern, coming from Cannacord Genuity: "Should February fail to bring a market pullback, we believe the odds of a bigger correction this spring will mount as the valuation of cyclical stocks prematurely overshoots."
The firm cited high investor complacency, a widening in credit spreads (particularly in Europe due to anti-globalism political developments), and another drop in China's foreign currency reserves, despite various capital controls. They argue that "the 'reflation trade' is tiring" and are neutral on stocks.
Really? It doesn't show up in the markets. A lot of people are confusing short-term trends with intermediate and longer-term trends.
It's true there has been some modest weakness this month. Crude is down. Bond yields are down. This has put some pressure on energy and bank stocks.