The economic calendar is normal, and we have a four-day trading week. Last week’s big stock decline will surely be on the minds of many. With measures and counter-measures, threats and rhetoric, the trade issue will command the attention of all. The punditry will be searching for signs of compromise, wondering: Can a trade war be avoided?  

Last Week Recap

Three weeks ago, WTWA asked whether a trade war was underway. I opined that there was plenty of room to pivot away from the initial actions against steel and aluminum. That is what happened. This week the question arises again, and in a more serious form.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. The Investing.com version of the S&P futures shows the action while the stock market is closed. The interactive version also lets you specify your choice of both time and intervals. Finally, there is a tag for significant news at various key points.

The decline for the week was about 6%, with a trading range only slightly higher. This is a resumption of the volatility seen earlier this month. It always seems even larger in market declines. You can stay anchored by data if you check out the actual and implied volatility each week in the Indicator Snapshot.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

WTWA is not about long-term concerns like debt. These are important, of course, but not our weekly subject unless there has been some major change.

The economic news was good, but the policy news was not. The market reacted to the latter. New Deal Democrat’s excellent update of high-frequency indicators is still positive but shows a little softening.

The Good

• Existing home sales increased to a 5.54M annual rate improving from January and slightly beating expectations. Calculated Risk notes that inventory is low and falling year-over-year (down 8.1% in February). He has a special post on how to watch inventory. See also New Deal Democrat’s analysis of pricing and inventory.
• New home sales registered a 618K annual rate and January was revised upward from 593K to 622K.
  Calculated Risk notes that the prior two months were also increased. The recent trend has been a bit sluggish, but Bill is not yet ready to blame interest rates or tax changes.
• FOMC decision and conference. The Committee’s rate increase was expected and initially celebrated by stocks. Chairman Powell’s press conference was also well-received, so I score the Fed as market-friendly.
• Rail traffic has improved, especially in what analyst Steven Hansen identifies as the “economically intuitive sectors.” He concludes that the growth rate is improving but does not yet portend an economic growth spurt.

• Passage of a spending bill. Signed by the President after mentioning a possible veto, this averts another threat to close the government.
• The Chemical Activity Barometer is still near the highs. Check out Davidson’s (via Todd Sullivan) discussion of how effective this indicator has been.
• Durable goods orders increased 3.1% on the headline and 1.2% ex-transportation. Both doubled expectations in a big recovery from the January decline.
• The hotel occupancy rate is strong and rising. Calculated Risk provides an interesting chart of the four-week average. It reflects seasonality and compares key years.

• Leading indicators were up 0.6%, improving from 0.3% last month, beating expectations, and setting a new high. 

The Bad

• Initial jobless claims increased to 229K from the prior week’s 226K. This report, still at a low level, reflects the week that will be part of the next payroll employment report.
• Trade news. The main subject of this post.
• Q1 GDP is now estimated at 1.8% growth according to the Atlanta Fed’s GDPNow.

The Ugly

Facebook. Not protecting data. Not responding effectively. Not creating a convincing solution. Background – The Verge. Seriousness – Medium.

A problem is that users and their data are the product for Facebook. Barron’s features the story, noting that the stock is cheap. The stock also qualified on the earnings screens for our team, but I think it is too soon. There is no way of knowing how many users will leave or how earnings will adjust. Even if you are not concerned about ethical considerations, there will be time to evaluate this choice.

The Calendar

We have a normal economic calendar. It is a short trading week with markets closed for Good Friday and the data all reported Tuesday through Thursday. The confidence indicators will provide some insight into consumer perceptions. Personal income and spending are the most important reports. The Fed’s favorite inflation measure, PCE Prices, is not expected to change.

Like it or not, the Washington circus may well dominate the news – once again.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The economic calendar is normal but squeezed into a short week. Last week’s market decline has certainly captured attention. With general agreement that trade issues are the underlying cause, expect people to be asking: Can a trade war be avoided?

There are hundreds of good articles on this topic. I have culled some of the best for those who want to learn more about the background, key issues, and stakes.

Good background on trade wars: Bloomberg and Fortune CEO Daily. From Clay Chandler in Fortune:

New York Times correspondents Sui-Lee Wee and Keith Bradsher argue Beijing’s relatively muted response to Trump’s tariffs so far reflects Xi Jinping’s confidence that, in a trade showdown, Trump will be the first to blink.

Chinese officials have hinted that they are prepared to impose retaliatory penalties on purchases of Boeing aircraft (for which they could easily substitute aircraft from AirBus), US soya beans (for which they could easily substitute soya beans grown in Brazil and Argentina) and US-made automobiles. The threat to limit imports of US soya beans is particularly astute; China buys 70% of US soya bean exports and the counties that are biggest soya bean producers are located in states that were crucial to Trump’s electoral victory.

Will Xi blink first? Or has Trump overplayed his hand? We’re about to find out. But my hunch is that China is in a much stronger bargaining position than the author of “The Art of Deal” imagines.

The economic importance of China. (GEI)

Industry impacts – Cars (Statista via GEI).

China started the trade war. Greg Ip analyzes key background on the problems and why current policies are not enough.

What about a retaliatory spiral? (MarketWatch)

Corporate leaders are asking for moderation in the Trump policy. (WSJ)

US allies urge trade peace. (WSJ)

Economists broadly agree on the value of free trade, without reference to any specific agreement. Here are two excellent analyses of the current issues – first-rate analysis in a non-partisan fashion. Prof. Marty Finkler describes six false premises to the new US policy. Here is a chart on the trade deficit and economic well-being.

Prof. Menzie Chinn cites a better measure of the trade balance, reflecting the value added. Check out the full post for complete analysis and charts.

The more relevant (from an economic perspective) variable is the amount of value added traded. In an era of global supply chains, bilateral final goods balances can be misleading. The value added series takes into account the fact that about 50% of the final good exported from China incorporates foreign content.

Trump policy is keeping everyone guessing. This includes allies, markets, and industry. (NYT)

The Indicator Snapshot

Short-term trading conditions improved again this week. Once again this shows why you need objective indicators rather than relying on your impressions about events. We continue to monitor the technical health measures on a daily basis.

The long-term fundamentals and outlook have been unchanged through the recent bout of volatility.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. His business cycle index, which we use in the Indicator Snapshot, is no longer “on the peg” at 100, but does not indicate a recession.

Guests:

Brian Gilmartin provides further color on the S&P earnings yield jump. He reviews the underlying numbers as well as the technical picture.

James Picerno has updated his business cycle report, showing a solidly positive macro trend through February. Here is his economic trend analysis.

And also, James notes a comment from the new Fed Chair, Jerome Powell, questioning the usefulness of yield-curve inversion as an indicator of the economy. That is something to watch.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. This week we asked, “How long was your learning curve?” We discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring the NASDAQ 100. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While my intent is to focus on traders, long-term investors may benefit from a better understanding of what the issues are for traders.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility. I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this stimulating analysis by Mark Fleming-Williams of Stratfor (via GEI). The title emphasizes the big returns from the tax reform legislation, but the scope is much broader. There is analysis of the resulting implications for debt, the possible impact on bonds, the interaction with demographic trends, and a discussion of artificial intelligence.

There are several themes for investors to consider, beginning with what he calls the “cashbergs.” The impact of increasing artificial intelligence is also a great theme.

 

Stock Ideas

Carnival (CCL) gets the nod from D.M. Martins Research. I agree with the pro-cyclical thesis and I like the support from baby-boomer vacationers.

The energy sector? Hale Stewart takes his usual approach, combining fundamental and technical analysis. He concludes that the stocks will follow the increase in oil prices.

Nike? (NKE). Stone Fox Capital says “no.” D.M. Martins thinks the stock looks “even better” after the earnings report. Reading two good reports on the same stock is a great way to do your homework.

Time for another look at MLP’s? Dividend Sensei discusses some interesting high-yield opportunities contending that the market is wrong.

Dividend Champions, Challengers, and Contenders have been updated by David Fish. Join me in following him to track all these opportunities.

Personal Finance

Gil Weinreich continues his excellent series. While theoretically aimed at advisers, there are many themes of interest for individual investors, especially this week. I especially enjoyed his warning about why scams seem so foolish (actually a necessary condition to find the right audience) and why some bad investments are even attractive to the “non-gullible.” Gil cites a nice piece from Adam Hoffman going into more detail. Interesting reading, and maybe something that will save you from a bad idea.

Abnormal Returns has a special Wednesday focus for individual investors. There are a variety of ideas, and nearly always something you will find useful. I especially liked Jonathan Clements’ helpful discussion of retirement calculators, including a good one to try.

Strategy

Blue Harbinger helps you determine the right level of cash to hold based upon your needs. As usual he provides some interesting ideas to help your choice of approach.

Tom Armistead, whose sensible thinking generates some great quantitative analysis, notes the elevated level of the Michigan Sentiment Index and links it market values and CAPE. He carefully notes (and I agree) the importance of inflation levels. He disagrees with my advice about ignoring politics, suggesting that current conditions call into question the DCF for the next ten years.

I clearly need to elaborate on this topic. I expect my asset allocations to change several times in the next ten years. Only those committed to a buy-and-hold strategy need to think this way.

Watch out for

“Defensive” sectors. Brian Gilmartin shows the results in consumer staples, widely regarded as defensive. In markets like we have seen recently there is no real discrimination in selling. Brian considers the top names in consumer staples. You will be surprised at the results of these safe-haven, dividend names.

Final Thoughts

Three weeks ago, I started closer coverage of the trade issue with this post. There was little attention at the time to a subject less titillating than the gossipy stories. As exemptions were made in the steel and aluminum tariffs, the trade story lost traction. With China now playing a leading role, this week’s stock market decline reflected the concerns of many.

What NOT to consider

The analysis of many “experts” is very shallow. It is important to watch this, because these people are the average traders and fund managers.

• “There’s multiple things going on, and none of it good,” said Larry X, managing director of international equity trading at company Y. “Six months ago, everything was good and you couldn’t find a reason to sell stocks. Now you can’t find a reason to hold them,” he added.
• A leading CNBC contributor who took a brief and unsuccessful fling at running a hedge fund is also worried about all the headwinds now, as opposed to a few weeks ago.

These people are driving the market. Meanwhile, the fundamentals of earnings, inflation expectations, and recession odds have improved. No wonder so few funds outperform the market. Impressionistic reaction to headlines should not drive your decisions.

For investors, it matters little who is responsible. We should focus strictly on the implications for financial markets. As a citizen, it is fine to take a principled stand on intellectual property, for example. If your personal citizen side prevails, your investment side had better sell stocks.

Recent Trump proposals have been stated and then modified after the reaction. The same thing might happen here, but I would not even venture a guess on this one.

What to Watch

A trade war could lead both to inflation and to lower economic growth, a nasty combination. Unlike many other elements of the “headline risk” we always see, this is something which has direct implications for corporate earnings. So far, the various threatened policies are of modest size (in comparison to the overall economies and markets). There is still time to negotiate and reach a face-saving conclusion. There is not yet an impact on the foundations of the stock rally: growing corporate earnings, low inflation expectations, and no recession in sight.

You should not make a big asset allocation decision because others, less grounded in the data, are selling their stocks. Do not substitute their fear for your own analysis.

That said, the trade situation is serious. Signs of softening of positions would be the most positive. Do not expect this to happen overnight.

I’m more worried about:

• Trade issues. The Commerce Department is recommending increased tariffs on steel and aluminum. Opinion within the Administration itself if mixed, with trade war warnings. Jonathan Swan (Axios) provides good coverage.
• Cybercrime, including attacks by various governments.

I’m less worried about:

• The Fed. The Powell approach continues a policy of gradual change with an eye on the data.

• Chinese bond purchases. China has a current accounts surplus with the US and must invest the dollars somewhere. US Treasuries remain an attractive choice; US equities are a principal alternative. Even an end to Chinese bond purchases would not represent a significant problem. For more details, check out my recent post on this topic.