The Trump agenda may be a bit more iffy, but it is certainly not dead, and the trading community still believes that some kind of tax cut is coming. » Read More
First quarter earnings are now expected to rise 10.4 percent from last year. » Read More
If the House vote fails, that's a clear negative for the markets and would lower the chances for tax reform. » Read More
While the S&P 500 is still only 2 percent off its recent historic highs, other sectors are already in correction territory. » Read More
Is the Donald Trump rally over?
Refresh my memory. Is this the fourth, fifth, or sixth time I have been asked this question by traders since mid-December?
I don't even know. The S&P 500 ended up roughly 1.3 percent for the week. But because the market tapped out at 2,351 Wednesday afternoon, and has drifted lower since then, there is the by-now usual wailing and gnashing of teeth, wondering if the Trump rally is over.
Relax. The two underpinnings of this rally — the Trump Rally, and the reflation trade — are both very much intact.
The reflation trade — the rise in interest rates and the slow, near-synchronous improvement in economies in the U.S., Europe, Asia and Latin America — is continuing.
The Trump trade — the lowering of corporate taxes, the reduction of regulation, and an infrastructure spending program — is also still very much intact.
It's intact despite the fact that President Trump has indicated that Obamacare may be a legislative priority over tax cuts. It's intact despite the fact that SenatorMike Crapo, chair of the Senate Banking Committee, said on Wednesday that regulatory reform will take 12 to 24 months.
You can argue — as my old colleague Ron Insana has — that risk is undervalued.
I won't argue with that. We should have more significant profit taking, but we're not getting it.
That tells me there is still a lot of momentum. We hit another historic high of 2,351 on Wednesday.
Don't you think we should at least see some technical deterioration before we declare the rally over?
But just look at how the market acts. Betting on a market drop has been a total loser. On days like Friday and Thursday, when the markets are down, there is no significant volume, which is a positive.
Everyone is hopeful that the market drops more so they can buy the dips, not get out.
The alternatives? Bonds don't look attractive given inflation, another reason to stay the course.
Where do we go from here? Have you noticed that all the strategic experts have been too conservative? The average strategist has been at roughly 2,350 for the S&P 500 by year-end, with only a few in the 2,400 range.
Well, we are already there. We're at 2,350. And it's only February!
What about Trump? Of course, his unpredictability is a problem, but look at what happened with the immigration order. He found out that there were some checks on his unpredictability.
On the economy, there are more ways that he can help than hurt.
That tells me there is no reason we can't go through 2,400 on the S&P 500.
Bottom line: the global backdrop is getting better. The earnings outlook is improving. The advance/decline line remains strong. Market leadership remains in financials and technology, supporting the recovery in cyclicals. Companies are making good money in the current environment, so changing the rules is just more gravy.
My take: unless you believe that there will be a huge disappointment in earnings this year, it's hard to argue that stocks are dramatically overvalued.
The worst thing you can say is that the market is a hold, with no big reason to sell.
Sure, it's a little boring some days, the volume is light, and the narrative has stayed the same for a while, but consolidation is a good thing.
It's not a table-pounding buy, but net-net, there's no reason you shouldn't stay with stocks.
What's up with oil?
It was down yesterday morning on reports of higher inventories, then higher later in the day on vague reports OPEC was considering extending supply cuts.
Despite the confusing signals, energy stocks are sending a very negative story: Oil is likely to remain in the low $50s for the rest of the year.
The evidence is everywhere. Chevron is at a new low for the year. ExxonMobil is trading like death, down nearly 9 percent for the year. The SPDR S&P Oil & Gas Exploration & Production ETF, heavily weighted toward U.S. producers, is down nearly 5 percent for the year.
Look, I know the drill, this sector was going out of business at this time last year. It's had a tremendous move since the February 2016 bottom, up 25 percent or more. It rallied into the end of last year.
I know all that. But I also know the market has been drifting higher since the beginning of the year and oil stocks have been drifting lower. And it's not a one-day affair. It's a clear trend.
A reasonable conclusion is that there is a valuation problem for Energy stocks. The markets are still discounting a significantly higher price for oil, and a lot of people seem to doubt it is coming.
How much higher? I don't know, but a lot of people at the end of last year were talking about oil in the $60s or even $70s in 2017.
The bulls still believe we are in an up-cycle. "Demand keeps growing, OPEC has pulled back, technology continues to improve well results (and returns), fast production declines from shale wells still need to get replaced," one hedge fund trader specializing in trading oil stocks told me today.
But look at the supply side. Traders have noted that more than 200 additional rigs have been added. U.S. production is back up to 9 million barrels a day.
The bulls keep talking about the fact that a number of companies raised their estimates for capital expenditures. That's good news for oil service companies, but it doesn't change the facts: they are throwing a lot more money into a market that is well oversupplied.
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.
The German stock market closed today at its lowest level of the year. That may sound surprising, given that that the European economy is showing clear signs of improvement. ECB Chief Mario Draghi said the European recovery was "resilient." The Eurozone PMI rose to its highest level in 69 months.
Yet there it was: The German DAX down 1.2% to a new low for the year, with the rest of Europe down as well.
What gives? It's obvious that political fears are trumping economic optimism.
Now they are beginning to realize that they could be wrong on the direction of European politics, and they are trying not to get surprised again.
No one is laughing anymore at the populist candidates who have been making provocative statements for years.
No one is laughing anymore when Marine Le Pen, the leader of France's populist National Front party and one of the front-runners in the upcoming French election, says she will pull France out of the eurozone.
If they leave, what does it do to the eurozone experiment? That is a clear negative for bond prices. Right now, sovereign debt is priced with an implicit backstop from the ECB. But under Le Pen's plan, the French government would be the sole backstop, with a bunch of Socialists in charge! How would you price the credit spread? I bet you'd cut the price of French bonds.
Snap has investors hoping that the IPO market may finally be taking off, after a virtually lost year in 2016.
One small detail in the announcement caught my eye. What's amazing to me is that this may be the largest IPO since Alibaba — with an estimated market capitalization between $20 and $25 billion — and it has only 1,859 employees.
That may seem like a lot of people, but compared to other companies with a similar market cap, it's pretty small.
Employment at companies with market cap between $20 billion and $25 billion
If you want to narrow the focus to just technology companies with a similar market cap, there is still far greater levels of employment among what could be called "old tech:"
Employment at technology companies with market cap between $20 billion and $26 billion
It's easy to understand why a company like Snap employs fewer people: the nature of most new software/social media companies is that they don't need that many people.
My point? These companies — the software companies of the future — may be great engagers and they may have a great business model, but they are not going to be employing vast numbers of people.
Of course, Snap is still growing. They only had roughly 600 employees the year before. So getting to 1,859 was quite a feat and they will undoubtedly add more.
But not that much more. They are unlikely to ever have the 31,000 people Micron has.
"If the goal is job growth, it's not going to be coming from these companies. They just don't need that many people," Cindi Profaca from IPOfinancial.com said.
Fewer employees, of course, means higher productivity, and that's one of the reasons these companies are so attractive to investors.
"That's why there is such high multiples for these software companies. The profit margins are really high because they can scale very easily without adding that many employees," Kathleen Smith from Renaissance Capital said.
Let's hope Snap finally puts the IPO market into high gear. President Donald Trump's emphasis on cutting regulations is music to the ears of those in the small-cap universe that makes up most IPOs.
Just don't expect many of these companies to move the needle on the jobs report.
Charles Murphy's Fairfield Greenwich fund had invested $7 billion with Madoff.
The health-care debacle could make the market more jittery as Washington moves on to focus on tax reform.
Monday's market action amounted to a fairly benign volley in a series of shots Wall Street is sending to Washington.