Political Pressure Everywhere
This could prove to be an important week in the political affairs of several countries. British Prime Minister Theresa May is now offering lawmakers the opportunity in mid-March to vote on a disorderly no-deal Brexit or to vote for a delay in Britain’s exit from the European Union. However, May indicated that the only way a no-deal option would be off the table would be to revoke Article 50, which she will not support. In sum, this new development means if May fails to get a deal approved by the current March 12 deadline, Parliament has the opportunity to push the Brexit cliff date out to the end of June. If so, the Brexit saga may simply continue to weigh on the European continent for three additional months. Nevertheless, the pound rallied on the news.
In South America the Venezuelan humanitarian crisis deepens. On a visit to Bogotá, US Vice President Mike Pence stated that President Nicolas Maduro’s action to block aid to the people of Venezuela has solidified America’s resolve to support opposition leader Juan Guaido. The US responded with a new round of sanctions and asked the United Nations Security Council to vote on a draft resolution calling for immediate elections in Venezuela and the delivery of humanitarian aid.
This week also includes another historic summit between President Donald Trump and North Korean leader Kim Jong Un in the Vietnamese capital of Hanoi. This is their second get-together in twelve months and the US delegation hopes this meeting will move both leaders closer to a deal that will include tangible steps by North Korea to dismantle its nuclear weapons program. Meanwhile in Washington DC, Trump’s prison-bound former personal attorney Michael Cohen will respond to questions from lawmakers in both private and public forums regarding President Trump’s personal finances. These meetings are transpiring as reports circulate that Special Counsel Robert Mueller may be nearing the end of his investigation into whether Russia and Trump’s campaign colluded to interfere in the 2016 presidential election. The Democratic-based House of Representatives just passed new legislation to terminate President Trump’s proclaimed national emergency at the U.S.-Mexico border and this sets up a vote for the bill in the narrowly-led Republican US Senate. In our opinion, it would be refreshing if Congress would re-direct its energy from political power plays on the border to more productive work like comprehensive immigration policy reform.
Federal Reserve Chairman Jerome Powell is giving his semi-annual Monetary Policy Report to the Congress this week and it began with Tuesday’s meeting with the Senate Banking Committee. Unfortunately, many questions from Senate Committee members to the Fed Chief were directed more toward politics rather than monetary policy and were frequently statements rather than questions. This trend is apt to escalate as he heads to the House Financial Services Committee on Wednesday which is now led by California Democrat Maxine Waters and now includes new liberal members such as freshmen Representatives Alexandria Ocasio-Cortez, Rashida Tlaib and Katie Porter. Chairman Powell has already expressed skepticism about modern monetary theory and other aspects of the new Democratic-sponsored Green Deal so we expect Wednesday’s testimony could be confrontational and will therefore be watched closely by many.
But the stock market appears surprisingly unfazed by these political events and has focused instead on the expectation that progress appears to be made on a US-China trade deal. The year-to-date gains in the DJIA and SPX are currently 11.7% and 11.5%, respectively, which means the DJIA and SPX are now up 19.6% and 18.8% from their December 2018 lows and only 2.9% and 4.7%, respectively, from their all-time highs. Our technical indicators are implying that the December trough represented a significant low in equities. Equally important, after a decline of 10% or more, history shows that the average DJIA advance lasts an average of 24 months and gains an average 81.7%. The average advance in the SPX after a decline of 10% or more has lasted 15.2 months and generated an average gain of 55.9%. See pages 3 and 4. But while the underpinnings of the current rally are strong, we expect the advance will and should consolidate after solid double-digit gains. In short, we expect a near term trading range market.
Last week we noted that the preliminary results for February’s University of Michigan consumer sentiment survey showed a gain after some worrisome weakness in January. And we hoped that the rebound in the University of Michigan survey would be the first of a series of better data points in sentiment. (See “Conflicting Economic Data Leaves Fed on Hold” February 20, 2018 page 4.) This week’s release from the Conference Board was reassuring since it too had a recovery. The Conference Board consumer confidence index rose sharply from 121.7 in January to 131.4 in February. Also encouraging is the fact that both surveys had robust gains in the “expectations” index implying that consumers are becoming more hopeful about their financial future. See page 5. This helps to explain the stock market’s recent confidence and shows that investors are more focused on economic factors like trade, than on divisive political rhetoric.
Investors will get more information about the state of the economy on February 28th when the initial estimate for fourth quarter GDP is released. Recent data suggests that corporate investment slowed at year end and for that reason economists are expecting to see a sharp decline from the second quarter pace of 4.2% and the third quarter rate of 3.4%. These last two reports indicated that US economic activity was well above the long-term average rate of 3.2%. Many forecasts are looking for the fourth quarter’s pace to fall well below 3% and the Atlanta Fed’s GDPNow forecast is currently at 1.8%. Anything substantially stronger than that could be a boost to sentiment. See page 6. Also released this week will be December’s personal income and personal expenditures. In November, a 3-month average of personal consumption expenditures showed spending was growing at a 4.8% YOY pace, faster than the 4.3% rate in personal income. In our view, the personal income report will be a better indicator of 2019’s economic potential than GDP. See page 7.
Steady Improvement in Technicals
Technicals continue to be strong and the 200-day moving averages have been exceeded in all three popular indices. The Russell 2000 index is the one index yet to break above this significant resistance level, however it is testing its 200-day MA this week and the trend looks favorable. See page 10. The 25-day up/down volume oscillator is at 3.04 (preliminarily) this week, barely in overbought territory, but this still represents the indicator’s 22nd consecutive day in overbought territory. As a result the current reading is the longest overbought condition since the 27 of 29 consecutive day overbought reading seen in May 2009. The current signal is now the 4th longest overbought reading since 2008, up from last week’s 8th place ranking. Also, the oscillator reached a high of 6.84 at the end of January which was the highest overbought reading since August 13, 2009’s 6.90. Note that this 2009 reading appeared early in a new bull trend. Long and extreme overbought readings are characteristics of bull markets and the strongest overbought level typically appears at the beginning of a new bull market cycle. In short, this oscillator is definitively bullish and we remain bullish for the longer-term with a target of SPX 3150. We would buy all dips.
“Overweight”: Overweight relative to S&P Index weighting
“Neutral”: Neutral relative to S&P Index weighting
“Underweight”: Underweight relative to S&P Index weighting
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