Monthly Market Update - May 2019
In his iconic The Waste Land, T.S. Eliot may have described April as ‘the cruelest month’ but that certainly doesn’t apply to 2019 stock performance. Led by the largest of the large cap tech stocks, a fully diversified equity portfolio rose a very solid 3.5%, proving once again that April deserves its reputation as one of the two historically strongest months (July is the other) for stock performance.
Current Market Conditions
Leading the tech charge, in particular, was the exact right group a big bull would want. The semiconductors (or ‘chips’), regarded as the most economically sensitive of all tech sub-industries, rose nearly 9%. Facebook rose 22%, Microsoft up 29% and Oracle plus 9% - other highlight-reel performers among the tech sector. And close behind tech were the ‘choo-choos’, i.e., the railroad stocks, with all the major components up 5-6% for the month. One of my long-held tenets is that if the ‘chips and the choo-choos’ are in gear, that’s a very strong sign for future performance.
Also acting quite well as April came to a close has been the financials, most especially the major and regional banks. This is the industry that essentially greases the financial skids for all domestic and global economic activity. To be sure, they had been among Wall Street’s weakest performers for well over a year and were due for a catch-up phase. But a slight re-steepening of the yield curve has also provided a bit of a tailwind for the group.
In aggregate, Q1 earnings reporting season, still with about another week to go, has been quite a bit better than expected, as comparisons with last year’s Q1 will be roughly flat. Never mind from the near-apocalyptic (down 7-10%) fears from early January, these Q1 earnings were supposed to be down 3-5% as recently as four weeks ago. This upside surprise was validated by this past Friday’s Q1 GDP print of a +3.2%, well above the 2.5% expectation, which itself had risen from a barely-1% forecast as the year began.
With April’s rally, Wall Street has now almost round-tripped from its October 3 intraday S&P 500 high of 2970 (Dow Industrials at 26,999 – only a single point away from 27K), down to 2346 on the morning of December 26 (down 21% - a technical bear market), back to just shy of 2940 as we close out the month (up 25%). As last month’s Update noted, the ‘tape’ is strong – ‘Don’t Fight the Tape’. Also as noted last month, you ‘Don’t Fight the Fed’. The Federal Reserve is strongly waving the dovish flag, seemingly guaranteeing that it will ride to the rescue with further monetary policy accommodation should even the slightest of downside wiggles dare to appear. The overall message to all investors looks to be ‘Don’t Worry, be Happy’.
April’s Trading Volumes
Now it’s time to dial back the cheerleading a little. Trading volumes, another important internal sign of market enthusiasm, fell significantly in April, to the lowest average daily level for any month since mid-2006. Market breadth, i.e., stocks up versus stocks down, new highs versus new lows, is just uninspiring. As April comes to an end, those all-important semiconductor stocks have tailed off significantly, and two other April market leaders – Chinese stocks and the price of copper – also hit a bit of a month-end tailspin.
Also giving me a bit of pause were relatively soft earnings reports from 3M, Intel and UPS and each stock suffered significantly. In my opinion this is important to note because all are very macro-positioned within the economy, so any developing weakness in their business trends may portend poorly for Q2. Those stocks all fell more than 5%. And from UPS, one can draw a very tight connection to what Amazon told us last Thursday night that, despite its record Q1 earnings report, order rates began to slip as the quarter ended. And then Google (or officially Alphabet) announced Monday night that its growth in advertising decelerated markedly, creating a 3% air-pocket in its share price.
Ned Davis Research Investment Conference
On April 9, I was much honored to be a session-panelist at a very broad investment conference hosted by Ned Davis Research, attended by well over one hundred Wall Street investment professionals. The collective stock market forecast for the rest of 2019 showed 85% bullishness, with only one lonely true bear (not me) looking for more than a 10% decline from that day. Well over half were in the +10-15% camp – and this was after an already up-15% start to the year!! In my closing-in-on 40 years in the biz, I have never seen this level of near unanimity, even at the most extreme and soon-to-be-reversed index levels. Though not necessarily for the immediate future – ‘Don’t Fight the Tape/Fed’ are still very operative - this is most certainly a very negative contrary indicator.
Though one wouldn’t know this from the headlines, or from the spin some politicians are waxing poetic about, the above-mentioned blow-out GDP number was perhaps not all as cracked up to be, boosted considerably by a 1% shift in the trade composites, with exports rising faster than imports (which counter-intuitively is actually reflective of more weakness from US foreign goods rather than strength in overseas demand for our goods). Another 0.7% was due to rising inventories, goods produced but not sold. So the net-net increase of final sales to domestic purchasers was only 1.4%, hardly anything to write home about, much less trumpet.
And today’s report from the Chicago Federal Reserve District’s Purchasing Managers Index*, a fairly reliable indicator from America’s manufacturing heartland, slipped to a 3-month low, with actual production at a 3-year low, although some of that could be due to regional flooding.
Another thing—has anybody else noticed that gasoline prices are up near $3/gallon, the highest in a number of years? Gasoline consumption is what economists term ‘short-term price inelastic,’ meaning if you have to drive, you have to drive, no matter what gas costs. This reduces the amount of cash available for other consumption…one less trip to Target, one less trip to the local pub, one less order from Amazon – it begins to add up.
We can actually see this market-wise in the performance in the credit markets, most particularly the U.S. Treasury market. Despite all the strong stock performance, and the headline economic strength, interest rates continued to hold at very low levels in April, and actually declined in the final ten days. A 2.27% two-year note and a 2.52% ten-year bond just doesn’t square with a stock market at basically an all-time high. The very popular (and in my opinion a little too glib) theory of explanation is that our rates are just where they should be because inflation remains almost non-existent, plus rates on comparable foreign bonds are negative, meaning that you pay foreign governments to lend them your money.
This then begs the question, why is inflation so low? Sure, demographics matter – there are more millennials at lower wages pouring into the economy to replace higher-wage boomers, and sure, technological improvements reduce the cost-of-goods sold since machines work for less than people (which by the way isn’t exactly bullish since machines don’t consume even a fraction of what people do).
But I have a deeper and more primal concern and this gets more than a little wonky. Perhaps the seemingly at-odds messages from the stock and bond market are in actuality telling us the very same thing, that too much of this economic activity is creating too much aggregate supply, which no level of increasing aggregate demand can fulfill, which will then force prices down. If there are too many barbershops on the same block, haircut prices are going down for all of them and one or more may well go out of business. Stocks are responding strongly now because of the enthusiasm around the economic activity that is creating all those barbershops. Perhaps interest rates are down because the bond market may be recognizing the economic inevitability of having too many.
Maybe this thesis will be proven wrong – which will be terrific for investors – and I will be the first to so acknowledge. But for the time being, count me on the sort of concerned side at this very macro level.
Which is why I remain as I was a month ago, cheering Wall Street on ‘from underneath’, i.e., from a modestly below-target weighting for stocks within KLR Wealth client portfolios. April’s well-earned and 2019-validated position as the typical year’s second strongest month runs squarely into May, the over-time second weakest month of the year (September being the worst). ‘Sell in May and Go Away’ is a long-dated Wall Street truism that indicates that a strong calendar start often gives way to mid-year weakness lasting well into the fall, July notwithstanding. It’s hardly infallible but makes sense to me right now to pay its message at least a little bit of attention.
In the immediate future, there are still a massive number of S&P 500 companies left to report earnings – to include Apple tonight – and some very high-profile economic data points later this week, most especially Wednesday’s National ISM and Friday’s monthly jobs reports. Today’s geo-political news from Washington suggests that the U.S.-China trade talks will be resolved ‘one way or the other’ within the next couple of weeks. Each carries a reasonable level of uncertainty for Wall Street, for better or for worse.
A Final Note
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*This is known more familiarly on the Street as the Chicago PMI, always released on the last business day of the month, with the National ISM (aka PMI) on the first day of the next month.
The information provided in this update is for informational purposes only and should not be used as investment or tax advice. Neither the information nor any opinions expressed herein should be construed as a solicitation or recommendation by KLR or its affiliates. For investment advice tailored to your specific situation and investment objectives, please contact a KLR Wealth Management professional.
Published on: 04.30.19