I took several calls last week regarding the trade tariffs going into effect on Friday at 12:01 eastern time. Advisors were concerned about the impact of the much-touted tariffs becoming a reality and the potential for an escalation of the situation. But in reality, the stock market appeared to ignore the trade-war issues and focused instead on the U.S. economy.
In case you missed all the financial press hoopla, the U.S. made it official and the tariffs went into effect Friday morning. Then, as expected, China went tit-for-tat with their own tariffs - making sure that the U.S. fired first in what is certainly beginning to look and feel like a trade war.
So, how did the market respond to the new trade war reality? The S&P 500 gained 23 points on both Thursday and Friday and was up 41 points, or 1.5% on the holiday-shortened week. Not bad, not bad at all - especially in light of all the fretting about trade.
Traders Moved On (For Now)
As is often the case with the stock market, traders moved on from trade fears after the tariffs had been in place for about eight and a half hours. Instead, the focal point on the first day of the new trade-war world was another Jobs report that wound up being placed squarely in the Goldilocks category.
All About Jobs
The economy created 213,000 new jobs in June, which was above expectations. However, both the unemployment rate and the wage data "missed" relative to expectations. The unemployment rate rose to 4.0%, when a 3.8% reading had been anticipated. And hourly wages grew at an annualized rate of 2.7%, which was below the consensus expectations for 2.8%.
On the surface, neither of these numbers sound good. But if one does some extrapolation, the view of the data changes - in a good way.
...And the Macro View
The key here is that these "misses" are actually a good thing from a macro perspective. First, the rise in the unemployment rate shows that people (601,000 to be exact) are moving back into the labor force. This is good timing because business owners have been complaining for quite some time now about the lack of available skilled workers. The fear among economists has been that with demand for workers outstripping supply, price (or in this case, wages) would need to rise. But, with more workers entering the workforce, this worry can be put on the back burner - well, for now, anyway.
A similar thought process can be applied to the wage growth data. The concern has been that wages would rise due to the lack of supply and improving economic conditions. The really big fear is that this is how "runaway" inflation gets started. And as Paul Volcker found out in the 1980's, this is a cycle that can be difficult/painful to stop.
What Me Worry?
But with annualized wage growth below Wall Street's expectations and the current rate about where it was at this time a year ago - this despite the improving jobs market and the tax cuts - one can argue that wages are not at worrisome inflationary levels. And with more workers becoming available, the thinking is that employees don't have a high degree of bargaining power to demand higher pay.
Call it a Goldilocks report, a sigh of relief, or whatever you'd like; the key is that the focus is currently on the outlook for the economy. And the way the game works is if the economy's growth rate is higher than anticipated, then growth can overcome the negative impact to the economy created by the trade war. And this, of course, gives the U.S. some wiggle room in their negotiations to improve the balance of trade.
Will this macro view come to fruition? Hard to tell. But at least for one hot summer day in July, the thinking was good enough to put the worries aside and do some buying.
Now let's move on to a review of my favorite indicators and market models...
The State of the Big-Picture Market Models
I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the prevailing major trend.
The Bottom Line:
- The Primary Cycle board is not in its happy place right now. The key takeaway is two of my favorite long-term models are negative and on sell signals. And because these models have been "right" during big, bad, bears, their historical returns in the red mode are severely negative, which has pushed the average return into the red as well. In short, this board makes risk managers like me sit up and take notice.
The State of the Trend
Once I've reviewed the big picture, I then turn to the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.
The Bottom Line:
- The trend board has improved, but, from my seat, is a bit misleading. The key is that while the S&P 500 has been stuck in a range and the index has been moving higher within the range since April, it has not yet broken out. As such, I'd hold the applause for the trend board at this time.
The State of Internal Momentum
Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.
The Bottom Line:
- Ditto for the momentum board. Yes, the indicators have all improved, but market momentum doesn't appear to be as strong as the board might indicate. This is due to the fact that several of the model readings are just barely in the green zone.
The State of the "Trade"
We also focus each week on the "early warning" board, which is designed to indicate when traders might start to "go the other way" -for a trade.
The Bottom Line:
- The "Early Warning" board gave us a clue that the bulls had the edge recently. However, that "edge" has now expired, and the bulls will need more than an oversold/negative sentiment condition to move ahead.
The State of the Macro Picture
Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.
The Bottom Line:
- One glance at the External Factors board, provides a good summary of the backdrop. Monetary conditions are now modestly negative, the economic model isn't as happy as it was, earnings are good, and both inflation and valuations are negative. In sum, this tells me that risk factors are high.
Thought For The Day:
Nothing can interfere with an idea whose time is coming. - Dr. Wayne Dyer