Crossing Wall Street Market Review – April 13, 2018
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
“Beware geeks bearing formulas.” – Warren Buffett
The Monday before last, the S&P 500 closed below its 200-day moving average. This, in my opinion, was a big deal, because it hadn’t happened in 21 months. Back then, the index had previously closed below its 200-DMA for a grand total of one day. This was during the freak-out following the Brexit vote.
Are we repeating ourselves? Since Monday, April 2, we’ve had a nice little rebound, but I’m skeptical it will last much longer. Over the last three weeks, the S&P 500 has been locked in a trading range that’s about 3% wide. While daily volatility has increased, the market seems unable to get any real momentum, either up or down.
Some of this seems to be driven by our on-again off-again trade war. Here’s something to think on. Earlier this week, our stock market rallied thanks to encouraging free trade talk from Chinese President Xi Jinping. It’s not every day that a Communist pseudo-dictator helps the U.S. stock market with his free-trade rhetoric. But here we are.
The Fed Is More Optimistic about the Economy
Yes, yes, I know—the Fed minutes are dull as dirt. And sure, the economists speak in dry econo-jargo-babble. Fortunately for us, I’m well versed in their dark and mysterious tongue, and I’m happy to translate.
On Wednesday, the Fed released the minutes from its March 20-21 meeting. This is when the Fed decided to raise interest rates. What’s interesting about these minutes is it shows how much more optimistic the Fed is about the economy, especially compared with a few months ago. Economists, it seems, can be as fickle as investors.
I should explain that the Fed minutes are a study in indefinite pronouns. The minutes aren’t complete transcripts. Instead, we read that “some members” said this while “a few members” said that. It usually takes a little decoding, but I was surprised when “all” was used a few times. For example, “all” members expect inflation to rise in the coming months. Also, “all” members agreed that the economy has gotten better in recent months.
That’s good to see, and looking at the recent data, I have to agree. Last Friday, the government said the economy created 103,000 net new jobs in March. That’s low, but I think the trend is still good. In fact, we haven’t had a negative month for NFP in nearly eight years.
The unemployment rate came in at 4.1% for the sixth month in a row. That ties us for a 17-year low. One weak spot is wages. The government said that average hourly earnings are up 2.7% in the last year. That’s not bad, but I think it should be better.
The good news is it would appear that inflation continues to be subdued. This week, we learned that headline consumer prices fell 0.06% last month. That was the first monthly drop in 10 months. Some of the drop was caused by lower energy prices. Gasoline prices were down nearly 5% in March.
The “core rate,” which excludes food and energy prices, rose by 0.18% last month. In the last year, core inflation is running at 2.1%. That’s higher than it’s been in a few months. Still, core inflation hasn’t strayed far from 2% for more than seven years.
Some of the Fed’s recent optimism is due to tax reform. However, the central bank is concerned about the prospects of a trade war. (Or so said “a strong majority,” which may be a new one.)
How does this affect us? In the near term, not much. We are not likely to see a Fed rate hike at the next Fed meeting in early May. But we’ll probably get one at the June meeting. Even after that, real interest rates will still be negative. Despite the higher volatility, in my opinion this is still a good time to be an investor.
The Fed is a long way from damaging the market or the economy, but investors must be careful. Don’t chase stocks. Don’t sell on every wobble. Stay focused on the long term and stick with fundamentally-strong stocks.