The market weakness in the last few days is just normal consolidation after a massive rally since the Christmas Eve lows. In the six weeks from December 25 to February 5, the S&P 500 rose over 16%, so a couple of down days are nothing to worry about. However, there is no doubt that President Trump’s National Economic Advisor Larry Kudlow’s comments on Thursday – that a “sizable distance” remains between the U.S. and China in protracted trade negotiations – spooked some nervous investors.
Kudlow said that previous talks covered “a tremendous amount of ground” and that enforcement will be very important, as well as technical and structural issues. Whether or not President Trump will meet with China’s President Xi before the March 1st deadline is uncertain, but Kudlow confirmed that in the spirit of good faith the tariffs on Chinese goods would remain at 10% (versus the scheduled increase to 25%). So overall, the China trade deal negotiations are proceeding, and both sides appear to be acting in good faith.
Treasury yields remain remarkably stable, despite a slightly lower bid-to-cover ratio at last week’s Treasury auctions. Wall Street is no longer distracted by interest rates and is now much more focused on fourth-quarter earnings announcements and 2019 guidance. So far, according to FactSet, 66% of the S&P 500 companies have announced their fourth-quarter results, posting annual earnings growth of 13.3% and annual sales growth of 7.0%, which are +4.0% and +1.2%, respectively, above analyst estimates.
Schumer & Sanders Knock Share Buy-backs for Bizarre Reasons
One reason why so many companies continue to post better-than-expected earnings is due to the fact that 2018 was the biggest year ever recorded for stock buy-backs. I do not have the final buy-back figure for 2018 yet, but since over $800 billion in stock buy-backs were announced earlier in the fourth quarter, I suspect that there were between $800 billion and $1 trillion in stock buy-backs for all of 2018.
Writing against these stock buy-backs, Senators Chuck Schumer and Bernie Sanders wrote an opinion piece in The New York Times last week arguing that “Corporate self-indulgence has become an enormous problem for workers and for the long-term strength of the U.S. economy.” In this opinion piece, Schumer & Sanders said, “When a company purchases its own stock back, it reduces the number of publicly traded shares, boosting the value of the stock to the benefit of shareholders and corporate leadership.”
Frankly, I am at a loss to why Schumer & Sanders believe that companies should avoid trying to benefit their shareholders, especially since workers’ pensions are typically invested in the stock market, often with heavy concentration in company stock. Schumer & Sanders were apparently attempting to insinuate that stock buy-backs hurt workers, but they provided no evidence that stock buy-backs hurt workers!
Overall, I found the Schumer & Sanders’ NYT opinion piece to be truly bizarre and meaningless.
The Economic News Remains “Mixed,” Confounding Fed Watchers
The economic news last week was mixed, confounding the Fed – and the Fed watchers. First, the Commerce Department announced that factory orders declined 0.6% in November, due to sharp declines in electrical equipment and machinery attributable to falling energy prices. Economists were expecting factory orders to decline 0.2%, so this was a big surprise. Interestingly, the Commerce Department also reported that durable goods orders rose by a revised 0.7% in November, down slightly from 0.8% previously estimated.
On Tuesday, the Institute for Supply Management (ISM) reported that its non-manufacturing (service) index decelerated to 56.7 in January, down from 58 in December. Although any reading above 50 signals an expansion, this was the lowest ISM service index reading in six months, so the service sector’s growth appears to be slowing a bit. A big decline in the new orders component to 57.7 in January, down from 62.7 in December, was largely responsible for the drop. Eleven of the 18 industries surveyed reported growth, while seven industries contracted. Overall, some of this deceleration appears to be weather-related, since agriculture, forestry, education, retail, and information industries reported lower revenue.
On Wednesday, the Labor Department reported that U.S. productivity surged 1.3% in the fourth quarter. This is good news for fourth-quarter GDP estimates. The GDP will also be boosted by the fact that the Commerce Department reported on Wednesday that the U.S. trade deficit declined to $49.3 billion in November, the first decline in six months. A smaller trade deficit usually triggers upward GDP revisions.
Interestingly, President Trump and Treasury Secretary Steven Mnuchin had dinner with Fed Chairman Jerome Powell at the White House last week. I suspect now that Fed Chairman Powell is doing what President Trump wants, namely not raising key interest rates, the dinner was very cordial, especially since it was Powell’s 66th birthday. What is unknown is whether or not the Fed is also taking the stock market into consideration in its decision-making process. Since the Fed acknowledged that it is reluctant to raise key interest rates due to global events (like the China trade negotiations and economic slowdown, Brexit, etc.), I suspect that the Fed also is being influenced a bit by the stock market, but right now Treasury yields remain low, effectively tying the Fed’s hands from further raising key interest rates.
Finally, the situation in Venezuela remains tense. Tankers full of crude oil are sitting offshore, since the U.S. will not pay Petróleos de Venezuela, S.A (PDVSA) as long as Nicolas Maduro remains President and controls the military. Desertions among his rank and file soldiers are steadily rising, so it appears that Maduro’s days are numbered. National Assembly leader Juan Guaido has promised military defectors amnesty, so it will be interesting to see if military desertions continue to rise. Senator Marco Rubio said on Thursday that Juan Guaido will name a new board for Citgo, which is a U.S.-based refinery owned by PDVSA, so Maduro’s influence is fizzling fast. Overall, the standoff in Venezuela remains a mess, but with its oil revenue severely restricted, Maduro will not be able to pay his military leaders much longer.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.