July 26, 2019
The bull market continues:
- Transportation sector recovered from last week’s selloff and test of support.
- Financials, consumer discretionary, technology and industrials showing strength.
- Semis breaking out of previous high.
- Lately we’ve seen some strength in small and mid-cap, although not strong.
- Stocks recovered from last week’s selling pressure and remain above key technical support levels, while VIX is under pressure and below key technical resistance levels.
- In terms of earnings, some companies are beating expectations and some are not. But the bottom line is that in some cases, it is easy to beat excessive low estimates.
- Durable goods came in better than expected, up 2%
- GDP growth for the second quarter 2019 also came in better than expected, up 2.1% (1.8% was expected)
Path of least resistance for yields seems to be down. Lower and negative yields, like in the past, will force investors to take on more risk when looking for return on investments, helping equity markets. We continue to see bullish trends on S&P, Nasdaq, Russell (although not a strong one yet), Dax and Nikkei. The ECB would like to see higher inflation and for that to happen, they will lower interest rates weakening the Euro and giving a boost to the USD. To prevent the USD from strengthening too much and for US exports to remain competitive, the Federal Reserve must remain dovish.
In the long term this type of monetary policy without much needed structural changes, mainly in Europe, will only reinforce the development and growth of a financial bubble. But in the short term all of the above should help stocks because with negative rates, investors looking for better returns will be forced to take on more risk, which takes us back to the beginning of the previous paragraph.
As we saw on Thursday and Friday, the immediate consequence is a stronger USD (up trend continues) and weakening commodities (other than gold). Lower commodity prices should help the case for low to moderate inflation to continue. I thought the ECB wanted inflation to pick up a bit…
Low yields are keeping gold in an uptrend, which is very normal. Gold is also trending up alongside USD, which is unusual. Perhaps investors in gold and USD are seeking protection from a bubble in progress. I’m referring to the same debt and deficit bubble we have mentioned many times before. One day it will happen.
Saul A Padilla, RIA