"Emotional control is the most essential factor in playing the market. Never lose control of your emotions when the market moves against you. Don't get too confident over your wins, nor too despondent over your losses." - Jesse Livermore
Take a deep breath. With stocks struggling to find direction amid heightened volatility over increased tariffs and threats of new ones as the White House and China battle over trade, many investors are hyperventilating. They would be better served if they recalibrated their expectations on the results and timing of any future agreement on the China/U.S. tariff issue. Negotiations aren't over; they're simply part of an ongoing process to form common ground on issues that have been around for decades.
For the second week in a row, the trading week started off on a negative note as the major indices all opened lower. The Dow 30 shed 600+ points while the S&P was down 69. Fears that the trade negotiations are about to go off the rails was the catalyst for the panic selling. Turnaround Tuesday changed the tone and the positive sentiment carried through until selling returned on Friday. So as investors come off the "The worst week of the year for stocks", there was little to no follow-through in the panic selling. The Dow 30 and S&P 500 were flat on the week.
The cycle continues. Investors witness a time period where the positives are highlighted, then see a few headlines change the backdrop where the negatives take center stage. As quick as that change developed, a switch back to positives steadied the ship and the S&P sits 2.5% from the all-time high. That makes me wonder why many have themselves in panic mode.
An investor should be wondering if the stock market has this entire trade tariff issue figured out. It's hardly the demon it is being made out to be. Of course that comment will be fiercely debated. Now the talk is investors are getting too optimistic on a few of the positives that were mentioned recently. The best view was to never get overly negative on the entire situation in the first place.
Trade isn't the only negative out there. The naysayers repeat that all is not well. The yield curve is flattening, global growth will be stifled now, the U.S. expansion is old and about to recede, the stock market is overvalued because earnings are flattening, etc.
Now the pundits will debate whether this is an opportunity, or the beginning of what could unravel the equity market. Not many would agree, but this common sense view presented by Josh Brown explains how when these "fear" moments come along, they are the best thing for this bull market.
I have worked directly and indirectly with investors from all walks of life and every part of this country. I've also had the opportunity and the pleasure of associations with a sprinkling of foreign investors as well. I can promise you from an emotional standpoint that not many can endure the volatility and drawdowns that an equity portfolio brings to the table. It takes an understanding of how the market "works" along with a lot of discipline to stay focused.
One of the issues that is embedded in the minds of investors is the absolute "fear" over losing money. Of course there should always be a concern, it is a normal reaction. However, I do see a difference these days.
This mindset is more pervasive now than I have ever experienced. It fuels the sentiment figures that have been reported week after week. There are peaks of bullishness, but overall we are still below historic norms after years of new stock market highs. Many have been shaken out of the market along the way, while headlines kept reminding us that a crash was imminent. It is responsible for keeping investors on the sidelines sitting in cash for an inordinate length of time.
These days not only do market participants fear the "issues", they fear new highs in the stock market. I recently read commentary when the S&P recorded a new high at 2,945.
"But ultimately bulls are accepting a ton of risk with razor thin error margin. When the spill happens, it will be breathtaking."
It's no wonder market participants can't escape this fearful mindset with the constant reminders being part of this market backdrop for so long. So I'm not surprised that most investors are afraid to take a longer-term view. Now that is not meant to be 20 years. It isn't necessary to set a prescribed amount of time to that view. There probably isn't any right or wrong time frame to use. Instead, what it can do is eliminate the very short-term views that destroy the average investor.
Prior to the tariff turmoil, the latest upward move in stock prices demonstrated how a slow melt-up can occur during bull markets when there isn't much great news to forcibly move stocks up. However, the bad news isn't bad enough to meaningfully drive down prices. A neutral "headline" setting where the market trades without emotion. In my view when the market move is "up" in that environment, it makes a statement that shouldn't be dismissed so easily.
Along comes what is determined to be a huge negative and that message falls by the wayside, as the next bout of anxiety arrives on the scene. I have seen this mindset take place at EVERY new equity market high, and it happened again last week. The longer-term trend is immediately dismissed. The technical gurus all start with these warnings:
"This short term support level may be in jeopardy, if the S&P can't make another high soon, then it looks like the market is rolling over."
The concentration on the very short term is being accepted and followed by far too many investors these days. It's now all about the last headline and what just happened. Everyone wants any and all situations to be resolved "today". Anything short of that is unacceptable and represents a huge negative for the markets.
So, let me try this again. At the highs the S&P 500 was up 17+% for the year and some 25% off the December lows. So far the depth of this pullback is measured at 4.5%. When I add price action to the mix of other data points to form a strategy, I'm sorry but I simply don't see any issue.
Conjured up notions and jumping to conclusions has been the skeptics' way of approaching the stock market, and it's also been their downfall. Investors need to realize that stock prices follow a series of short-term trends inside of the dominant longer-term trend. Making rash decisions each time there is a change in the short-term trend because of a headline is a recipe for failure. It undermines the ability to step back and realize what is really going on.
There is but ONE view to make successful investment decisions, the view from 30,000 feet.
Scott Grannis explains how the economic situation isn't as bad as many make it out to be.
A Wells Fargo/Gallup survey found small business confidence rebounded strongly in the second quarter, matching a record, as current conditions posted a new high and recession concerns diminished. Top worries were attracting customers and new business, followed by hiring and retaining staff.
NFIB Small Business Optimism Index increased 1.7 points to 103.5. NFIB President and CEO Juanita D. Duggan:
"America's small and independent businesses are rebounding from the first quarter 'shut down, slow down' and don't appear to be looking back. April's Index is further evidence that when certainty and stability increase, so do optimism and action. The continued economic boom is thanks, in a major way, to strong growth in the small business half of the economy."
A May surge in Michigan sentiment left the index at a 15-year high of 102.4 from 97.2 in April versus a prior cycle high of 101.4 in March of 2018. Michigan sentiment has now rebounded sharply from the two-year low of 91.2 in January. All the various "soft" data measures have bounced since the December-January pullback, though analysts say we could face possible headwinds going forward from rising trade war concerns.
Leading economic index rose 0.2% to 112.1 in April, a new historic high (data goes back to 1959), after March's 0.3% increase to 111.9 in March. Seven of the 10 components made positive contributions, led by stock prices and the leading credit index.
April retail sales fell 0.2% overall, with a scant 0.1% gain in the ex-auto component, both weaker than forecast. And they follow March gains of 1.7%.
Empire State headline manufacturing index rose to a six-month high of 17.8 from 10.1 in April and a two-year low of 3.7 in March versus a three-year high of 27.1 in October of 2017.
Philly Fed manufacturing index rose 8.1 points to 16.6 in May, beating estimates, following the 5.2 point drop to 8.5 in April. The index was at 32.3 last year and is the best since 17.0 in January. It's climbed from a 33-month low of -4.1 from February.
Homebuilder's survey for May rose more than expected to 66 from 63 in April. It was 56 last December.
April housing report revealed headline gains of 5.7% for starts and 0.6% for permits. Data for March was revised up to show homebuilding rising to a pace of 1.168 million units, instead of falling to a rate of 1.139 million units as previously reported.
Chinese industrial production saw its year-over-year growth rate sag more than 3 percentage points from the huge 8.5% growth in March to 5.4% in April. The forecast called for 6.5% year over year growth.
Retail sales growth disappointed in April showing a decline to 7.2% from the 8.7% reported in March.
Brexit Talks Break Down as Labour Party Walks Away. The soap opera continues with no deal at the moment.
FactSet Research weekly update:
For Q1 2019:
With 92% of the companies in the S&P 500 reporting actual results for the quarter), 76% of S&P 500 companies have reported a positive EPS surprise and 59% have reported a positive revenue surprise.
The blended earnings decline for the S&P 500 is -0.5%. If -0.5% is the actual decline for the quarter, it will mark the first year-over-year decline in earnings for the index since Q2 2016 (-3.2%).
The blended revenue growth rate for Q1 2019 is 5.3% today. If 5.3% is the final growth rate for the quarter, it will tie the mark for the lowest revenue growth rate for the index since Q2 2017 (also 5.3%).
Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.5. This P/E ratio is equal to the 5-year average (16.5) but above the 10-year average (14.7.)
Financial sector has seen largest increase in revenues since March 31. The blended (year-over-year) revenue growth rate for Q1 2019 of 5.3% is above the estimate of 4.9% at the end of the first quarter.
The Health Care sector is reporting the highest (year-over-year) earnings growth of all eleven sectors at 9.2%.
For Q2 2019, analysts are projecting a decline in earnings of -1.9% and revenue growth of 4.2%.
For Q3 2019, analysts are projecting earnings growth of 0.5% and revenue growth of 4.3%.
For Q4 2019, analysts are projecting earnings growth of 7.3% and revenue growth of 4.7%.
For CY 2019, analysts are projecting earnings growth of 3.2% and revenue growth of 4.7%.
The Political Scene
The ongoing tariff positioning was ramped up to the next level this past week. President Trump stated it would be wise for China to "act now" to finish a trade deal with the U.S., predicting that "far worse" terms would be on offer after what he predicted would be his certain re-election in 2020.
Chinese Vice Premier Liu He meanwhile said the U.S. had agreed to hold more trade talks in Beijing, adding that "negotiations have not broken down." As expected the Chinese response to the latest increase by the U.S. was announced on Monday morning. The proposal is to increase tariffs on 60 billion of U.S. goods on June 1st.
The last time investors were greeted with tariff headlines in January and March of 2018, the market sold off hard. Not much has changed, as the next round of tariffs were greeted with more panic induced selling.
Investor sentiment is fixated on the negatives, and when emotion comes into play, we are likely to see a renewed period of volatility spurred by perceived negative headlines. That has already begun with the next move a threat of all Chinese goods being hit with a tariff, the potential $325 billion tranche. Investors have already shown how they intend to make this a near-term headwind for stocks.
Should any of these tariffs be reversed or reduced, that could lead to upside pressure in the equity market. The timing and enforcement of these tariffs will similarly play a role in the market response. Attempting to get "ahead" of this issue by positioning for an outcome either way may wind up being a big mistake.
Meanwhile, Minneapolis President Neel Kashkari noted there has been little to no evidence on the "reported" effect on the U.S. economic picture.
Separately the Trump administration plans to delay auto tariffs by up to six months as negotiations continue with the European Union and Japan.
U.S. Treasury Secretary Steven Mnuchin told a Senate Appropriations subcommittee that the Trump administration is making progress in resolving steel and aluminum tariffs that were applied to Canada and Mexico. Mnuchin also said that negotiators will likely travel to China soon to continue talks with Beijing and indicated that trade conflicts with Canada and Mexico are near resolution. Resolving these tariffs is "a very important part" of passing the U.S.-Mexico-Canada Agreement.
That seems to be a done deal now as the United States is set to remove steel and aluminum tariffs on Canada and Mexico in favor of stronger enforcement actions, a move that helps provide the pathway for USMCA ratification.
A national emergency declaration under the International Emergency Economic Powers Act (IEEPA) and a restriction on commerce with Huawei are the latest actions set to escalate trade tensions between the U.S. and China. An executive order signed by President Trump Wednesday will pave the way for banning equipment manufactured by "foreign adversaries" from U.S. networks and requires an assessment on the national security risks.
Chinese exports to the U.S. are down to a mere 3.5% of Chinese GDP.
The trade skirmish has already been extrapolated to the worst case scenario, and the talks of rate cuts enter the picture again.
Rather than form a conclusion before all of the facts are present, the situation becomes very simple. It will all depend on how the U.S. economy fares. Q1 GDP was forecast to roll in at 0.50 to 1%, the actual print was 3.2%. It may be wise to wait and see what happens before making portfolio changes based on trade rhetoric.
For those obsessed with the yield curve:
Source: U.S. Dept. Of The Treasury
The 2-10 spread started the year at 16 basis points; it stands at 19 basis points today.
Once again a brief period this past week where the 3-month/10-year curve inverted. This time the market did not react to it.
Tariff headlines have taken top billing in the past couple of weeks leading stocks to see their worst declines of the year. Sentiment has begun to reflect price action. One week after coming in at its highest level since October (around the time the S&P 500 hit its previous all-time high), bullish sentiment has fallen off of a cliff this week to 29.8% versus 43.1% last week. From a historical perspective, this is not at any kind of extreme, but it did bring optimism to its lowest level of 2019 and by a pretty wide margin. Additionally, this was the largest drop in bullish sentiment since December 13th of last year when it fell 17% in a week.
The Weekly inventory report showed an increase of 5.4 million barrels. At 472 million barrels, U.S. crude oil inventories are about 2% above the five-year average for this time of year. Total motor gasoline inventories decreased by 1.1 million barrels last week and are about 2% below the five-year average for this time of year.
Despite all of the concerns over tariffs causing a disruption in global growth, the price of crude oil remains quite resilient. WTI closed the week at $62.71 up $1.17.
The Technical Picture
While the S&P was in the midst of panic selling on Monday, the pundits couldn't get their forecasts out fast enough. S&P 2,650 seemed to be the consensus downside target. There was also talk of a complete round trip, and the index would revisit the December lows at 2,350. As you know anything is possible when emotion is ruling the day, and maybe these downside targets will come into play, making the pundits look like geniuses. Then again it's possible they will join the list of people that have overreacted and find themselves left behind. I also noted during this week that NO ONE was calling for higher stock prices.
Revisiting the opening thoughts of the article, it is never wise to jump to conclusions based on a quick, short-term emotional incident.
Chart courtesy of FreeStockCharts.com
The DAILY chart of the S&P 500 shows the index fell below, then quickly retook the 50-day short-term moving average (blue line), then moved back below again. This action shows the indecisiveness of the traders these days. One positive, there was no follow-through on the panic selling on Monday.
What we did see was plenty of consternation over tweets, headlines and analyst bluster over what is being presented on the global scene as a huge negative for equities. Maybe the investment community has already figured out the ramifications of what is transpiring on the global trade scene. Given the headlines, a 4.5% pullback to date after the gains that have been achieved off the lows, speaks volumes. Is anyone out there listening?
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from overall performance.
Individual Stocks and Sectors
The prize winning quote of the week.
"The retail sector can't get out of its way, and that is bad sign from the consumer, and a bad omen for the economy."
The calendar changes but the assessment of economic conditions and the reactions to those predictions remains the same. Very questionable. Two months ago, many were in a frenzy about the projections for sub-par growth in Q1 2019. Add that to what many viewed as a disturbing fourth-quarter GDP print, and this would translate to continued deceleration in real GDP. Take that one step further, it meant a recession could be lurking.
Oops! The U.S. economy accelerated in the first quarter, with real GDP up at a 3.2% annual rate for the quarter and from a year ago. The first round of trade tariffs were already in place for about a year. The premature comments for the Fed to cut rates were gone as fast as they entered the picture.
So much for the "sugar high of the tax cuts being over" theories. Now the argument is "can this be sustained"? With the trade tariff issue being ramped up, there is more ammunition for that argument. At least that is what we are being told now.
It's one thing for the majority of economists to stumble and make a mistake. It is quite another story when an investor stumbles. Real money is at stake. From where I sit, these same investor mistakes keep happening over and over. Every issue that comes along seems to be met with the same reaction. Premature decisions are made before ALL of the evidence is viewed and then carefully taken into consideration. Economists do that all of the time, investors need not follow their lead.
Nobody is perfect, we are all human and most assuredly mistakes will be made. Make the same mistake over and over and there is virtually no chance of experiencing success. Doing so while you are managing money is financial suicide. The successful investor never reacts impulsively, and if they do in fact "slip up," they quickly come to realize that and do their best to correct the situation.
Getting back to the economy, there is evidence building for "potential growth" in the U.S. economy accelerating. Corporate tax cuts remain in place, actual deregulation isn't about to be reversed, and there are lower odds of future regulation taking place. An opinion for sure, and it goes against the consensus where Q2 GDP estimates are being revised lower. The lower estimates seemed based on the day-to-day "feel" for the overall situation.
As we have seen, it was best not to make any quick decisions based on the negative economic projections, but many did just that. So the same applies to the view that all may not be so bad as everyone is suggesting. Of course that doesn't suggest you go out and start buying equities on margin. This is where those that have stayed the course are at an advantage, and the only folks in the pilot seat now.
So investors are at another crossroad. The ongoing trade talks with China will have the analysts tossing plenty of facts at us now on the effects of the tariffs. Trust me, none of it will be positive. The pundits have dusted off their remarks from the January 2018 time period to roll out and warn about Smoot-Hawley where consumers will be handcuffed to the point where the U.S. economy will roll over.
I remind all there were a lot of numbers tossed around when the first round of tariffs were imposed, and all were negative. The successful investor watched the price action in the equity market when all of that was going on, and concluded the situation wasn't as bad as being presented. In summary they didn't buy into that rhetoric then and they aren't buying it now. That proved to be the correct way to approach the investment scene. The confirmation then came with the Q1 GDP print of 3.2%.
At this moment in time, one can form a conclusion based on the negativity that is all associated with the tariff issue, decide to lighten up on equity holdings, and get completely defensive now that the S&P is near highs. I hear that from many investors now. Seems practical, but it wasn't a viable strategy in early 2018 when tariffs were first introduced. Sure there was an initial dip, then new highs were made. One has to wonder if the same mistake is about to be repeated again. Ask yourself, is this tariff issue now beyond fixing because there was no deal struck last week? Are there any possible outcomes that do not result in a dire situation for the global economy?
This never ceases to amaze me. Investors like to believe they can see what is going to happen down the road. Worse yet they start positioning for it! Somehow they will step out of the market, then simply come back into equities when the skies are clearer. They may be waiting a long time. Announcing you're going to be out of the equity market until the trade war is resolved is living in a fantasy land. If there truly is a resolution on the tariff issues down the road, the market will already be at new highs. You will find yourself joining in at a most inopportune moment.
As you know, the case was made to stay invested in December 2018, and April 2019 because of a strategy that has worked time and time again. I will state once again, I simply can't see months and years down the road, and make any comments on a large pullback or new highs. Anyone doing that is "guessing".
What I do know for sure is where we stand regarding the primary market trend. The markets are a fluid situation and what may appear to be smooth sailing today will be rough seas tomorrow. What I can see today are reasons to avoid overthinking the situation and stay with the plan that got savvy investors to this level. Rest assured when the situation materially changes so will the strategy.
There is no need to leave the equity market now, Stay The Course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to All!
"A deeper correction, or new market highs ahead? If your strategy does not include the macro scene, you are about to be left behind. The view from 30,000 feet is the ONLY way to negotiate this bull market. It is time to graduate from the commentary that states 'if this happens, than that will occur', only to change course in a few days."
"Ignore the whipsaw commentary. The Savvy Investor is here to assist, and members just cashed in on a selection that posted a 14% gain since May 10th. It's very simple, they weren't being told to run away from this market on Monday when the panic selling began. Leave the 'wishy washy' commentary to others, please consider joining in on our success."
Disclosure: I am/we are long EVERY STOCK/ETF IN EVERY SAVVY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL. positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.