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  Presents our Bi-Monthly ERPE Excerpts
John J. Gardner, CFP®, CPM®
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Bi-MONTHLY MARKET ANALYSIS & ECONOMIC UPDATES
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September 17, 2020
0 4-Ever?
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ZIRP (Zero Interest Rate Policy) has been kicked around the investment markets since the Federal Reserve bank (the "Fed") adopted this aggressive monetary policy to revive the U.S. economy from the blow of the Great Recession in 2009. Rates have remained low (near 0%) for a long time. Looks like they will be low longer. Back in the June FOMC (Federal Open Market Committee) meeting, the Fed left rates unchanged (again) and gave a strong indication that it will not raise interest rates for a long time - - maybe years! But, zero percent forever? While it would be folly to expect interest rates in America to be this low, let alone zero, forever, the Fed is committed to "do what ever it takes" to stimulate the economy. Here's more evidence of the Fed's mindset on rates now. Fed Chairman Jerome Powell has been quoted often since he recently said, "We are not even thinking about thinking about raising rates." In fact, just yesterday, the Fed reiterated it has no plans of raising rates anytime soon. In a nutshell, the Fed's message was no rate hikes for years. Sounded a lot like June. In its scheduled, two-day FOMC meeting, the Fed team led by Jerome Powell, said it would keep interest rates at zero through 2023. Further, the Fed does not expect to see inflation pick up for years, and it is willing to keep rates at zero even after it does. We know nothing is forever and everything can change. With that in mind, here's another thing Powell said yesterday, "We're going to continue to monitor developments, and we're prepared to adjust our plans as appropriate." Spoken like a polished politician, Powell.
More on what the Fed said below.
Abandoning the Phillips Curve
One positive result of the Fed's low-longer interest rate policy is it will essentially do away the Phillips Curve. This is basically the economic theory that policy makers must trade off between employment and inflation. So, historically the Fed tried to stay ahead of inflation by raising interest rates. The inflation fears usually were triggered by high employment. The Phillips curve is a single-equation economic model, named after economist William Phillips.
So, with abandoning the Phillips Curve the Fed will aim to achieve 2% inflation and tolerate periods of higher price increases while avoiding slamming its foot on the brake by raising interest rates. This is a win for the economy. However, not without future controversy. As the Fed overhauls its inflation policy now, it opens the door to debate and political pressure down the road. In essence, going forward the definition of a problematic period of inflation will be a hot topic.
Nothing will end "0 4-ever" interest rates like run-away inflation. Glad to hear the Fed has left the door open to adjusting its plans.
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Proper Perspective: In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn't help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective, especially now with stay at home orders in effect. Remember, COVID-19 will one day be COVID-PAST.
Famous Quote On This Day September 17: "If you consider the great journalists in history, you don't see too many objective journalists on that list."
- - Hunter S. Thompson, 1997
What Happened On this Day, 1983 - For the first time an African-American contestant, Vanessa Williams wins Miss America.
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INDICATORS OF INTEREST:
- Market's Current Signal: NEUTRAL. Analysis of the stock market over 130 years of history shows we can view it in terms of three stages - market in uptrend, uptrend under pressure and market correction. Since the 1880's, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points. The U.S. stock market is now in a "Uptrend Under Pressure."
On September 9 the stock market's signal changed to Uptrend Under Pressure. The outlook weakened as the Nasdaq fell 4.1% and closed slightly below its 50-day line on the 8th. The same day the S&P 500 declined 2.8% in higher volume. The Nasdaq had previously declined big on September 3, when it plunged 5% in higher volume. See my "Market Update" written that day.
Volatility is definitely back, as price swings are increasing both directions with a bias to the downside. Note that prior to the September 3 broad market fall, it had closed higher 13 of 16 trading days. I said then that what was concerning was that the major indexes were nearing key support levels that if breached could lead to a further fall. That has happened. This speaks to the new "uptrend under pressure" market condition. Still, amid the coronavirus stock market rally, the tech-heavy Nasdaq is up 23.2% for the year through yesterday's close. Meanwhile, the S&P 500 is up 4.8%, while the Dow is down 1.8% year to date, through yesterday. The market's volatility spiked again yesterday before, during and after Federal Reserve bank chairman Jerome Powell spoke on the Fed's interest rate policy and plans. It was, well, nothing new. As I noted above, the Fed reiterated its low-for-longer interest rate plan. Forever? Probably not. But for sure the foreseeable future.
The second quarter was the best for the Dow since 1987. An amazing August was the best August since 1984. Even after the fastest market "correction" in history (just 3 days), the market still has some of August's gains intact. This bull market has been resilient, resulting in a 'V' shape move, which you can see in the chart below. Though there's still a lot of uncertainty in the market, it continues to do what it has always done - "climb the wall of worry." However, as I have noted, momentum may have taken some growth stocks too far, too fast. As I have continually noted, bullish sentiment has been on the rise. Excessive bullish sentiment has been seen near market tops in the past, (conversely, extreme bearishness has been seen at near market bottoms). Keep in mind that a pullback or pause in the coronavirus stock market rally would be normal and healthy. Arguably a pullback has been "due" for several weeks, but the stock market is going to do what it's going to do - which is usually the unexpected. As I mentioned in my July 9 EXCERPTS, the Nasdaq was more than 20% above its 200-day moving average. This was a cautionary indicator. Now it is 14% above that trend line.
As I noted in the June 11 ERPE Excerpts, the Federal Reserve has signaled no interest rate hikes until 2023. The Fed reiterated this again yesterday. Other central banks around the world are also committed to doing what it takes to help their economies recover.
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| | Why it is called a 'V'! |
- Industry Group Strength: BEARISH As of yesterday, 83 out the 197 groups I monitor are up year-to-date. 114 groups are down for the year.
- New Highs vs. New Lows: BULLISH. In yesterday's session, there were 145 new 52-week highs and 21 new 52-week lows.
- Dow Dividend Yield: BULLISH. The current yield for the Dow Jones Industrial Average is 2.37%. With the 10-year Treasury now 0.68%. The 10-year is still at record lows.
- Volatility Index: NEUTRAL. Volatility has been volatile. The complacency trend has been shattered. The "VIX" is now 27. This is down from 35 two weeks ago. This index is also known as the "Fear Index." It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:
- Fear / Greed Index: BEARISH. Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The Fear/Greed index greed level is now 56, down from 59 two weeks ago. BE FEARFUL WHEN OTHERS ARE GREEDY.
- Bull / Bear Barometer: BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, the percent of bullish market sentiment to bearish is 54.8% to 18.3%, respectively. The sentiment levels are more bearish and less bullish than two weeks ago (61.5%:16.4%). This indicator, better known as the Investors Intelligence Advisor's Sentiment Index, measures the percent of market advisors with a positive market outlook vs. negative outlook. This indicator is now very bearish.
- Put / Call Ratio: BEARISH. The ratio of put-to-call options is .59, up from .43 two weeks ago. The all-time low of .21 was made February 21. It's new 5-year high is 3.08 made March 16. The previous 5-year high was 2.81 December 24, 2018. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they're buying lots of puts, they see the market declining. And if they're loading up on calls, they're generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high.
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Key Global Economic Indicators & Analysis:
POSITIVE INDICATORS
Jobless Claims Down: New claims also fell for the first time since mid-August. Initial jobless claims filed traditionally through state employment offices fell to 860,000 in the last week, the Labor Department said today. Economists polled had forecast new claims to fall to 870,000. The number of Americans who applied for unemployment benefits through state and federal programs fell in September for the first time in five weeks, but initial jobless claims are still very high and point to ongoing job losses due to the coronavirus pandemic. Altogether, the number of people getting benefits through eight state and federal programs increased by 98,000 to an unadjusted 29.77 million as of August 29, the latest data available. Fewer than 2 million people were getting receiving unemployment checks before the pandemic started.
Consumer Price Index & Core CPI Up: The consumer price index, a measure of the cost of living, rose 0.4% last month, the government said Friday. The biggest spike in the cost of used cars and trucks in more than a half-century accounted for more than 40% of the increase in the index. The increase in consumer prices over the past 12 months moved up to 1.3% from 1%. Another closely watched measure of inflation that strips out food and energy also rose 0.4% last month. The yearly increase in the so-called core rate edged up to 1.7% from 1.6%. The cost of cars and trucks rose 5.4%, to mark the largest gain in 51 years, an exaggerated increase that should fade soon. The cost of gasoline, meanwhile, rose a smaller 2% in August. The Fed plans to keep interest rates extremely low for at least the next year or two, due to the low rate of inflation (as noted above).
Empire State Index Up: The New York Fed's Empire State business conditions index rose 13.3 points to 17 in September, the regional Fed bank said Tuesday. The gain reverses a 14 point decline in the prior month. The new-orders index climbed 8.8 points to 7.1 in September, while shipments rose 7.4 points to 14.1. Unfilled orders continued to decline but at a less rapid pace. Optimism about the six-month outlook rose 6 points to 40.3. Economists are divided over the outlook for manufacturing. Some see the gains seen since July moderating into the end of the year. Others see the factory sector as a bright spot, noting the national ISM factory index hit a two-year high of 56 in August.
Industrial Production Index Up: U.S. industrial production rose 0.4% in August, the Federal Reserve reported Tuesday. Manufacturing output rose 1% in August but the gains for most manufacturing industries have gradually slowed since June, the Fed said. Mining production fell 2.5% in August as hurricanes and tropical storms battered the Gulf of Mexico and caused sharp but temporary declines in oil and gas extraction. Production of cars and trucks fell 3.7% in August after a strong gain in the prior month. "The industrial sector is recovering from the coronavirus recession, but growth will be slower through the rest of 2020 and in 2021," said a chief economist.
Capacity Utilization Rate Up: Capacity utilization rose to 71.4% in August. The capacity utilization rate reflects the limits to operating the nation's factories, mines and utilities.
Real Median Household Income Up: Median household income, adjusted for inflation, improved in 2019 after being nearly stagnant the year before. It jumped 6.8% to $68,703 from a revised $64,324 in 2018. The inflation-adjusted median income of all workers increased by a smaller 1.4%.
Poverty Rate Down: The poverty rate slid to 10.5% last year from 11.8% in 2018, the U.S. Census Bureau said Tuesday, marking the lowest level since the government began publishing the data in 1959. The number of Americans living in poverty sank by 4.2 million to 34 million last year. The massive government benefit paid out to the unemployed, are temporarily keeping them from falling back into poverty. But, those benefits could run out unless a stalemated Congress agrees to another aid package. Democrats and Republicans are deadlocked on how much to spend and where the money should go.
Uninsured Rate Down: The number of people without health insurance fell slightly to 26.1 million from 27.5 million last year, reflecting an improved economy. About 8% of the population did not have health insurance at any point during 2019. More than two-thirds of Americans relied on private health insurance. A little over 34% received their insurance from the government.
Retail Sales Up: Retail sales increased 0.6% last month, the government said Wednesday. Sales gains will likely to be harder to come by in the months ahead, especially after the end of generous federal aid for the unemployed and businesses. Sales rose 0.2% at auto dealers, which account for about one-fifth of all retail spending. Gas station receipts also increased 0.4%, largely reflecting an increase in the cost of gasoline. Retail sales are about 2% higher now compared to pre-pandemic levels in February, but they would almost certainly be higher had there been no viral outbreak. The massive infusion of federal aid gave a boost to consumer spending after the economy reopened.
NAHB Homebuilders' Index Up: The National Association of Home Builders' monthly confidence index rose five points to a reading of 83 in September. The index reading was the highest on record in the 35-year history of the data series, surpassing the previous month's record high. "The suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates," the chief economist for the National Association of Home Builders said in the report. Lumber prices are up more than 170% since April, a reflection of production constraints caused by the pandemic. Up till now builders have passed that cost on to consumers, but it could become a burden.
Business Inventories Up: Business inventories edged up 0.1% in July after declining 1.1% in June, the Commerce Department said on Wednesday. Inventories, a key component of gross domestic product, had dropped for six straight months. An inventory draw-down contributed to GDP declining at a record 31.7% annualized rate in the second quarter. Inventories subtracted 3.5 percentage points from GDP, the most since the first quarter of 1988. Inventories have declined for five straight quarters.
WEAK INDICATORS
Home Construction Down: Construction declined in August. U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.42 million in August, representing a 5% decrease from the previous month but a 3% uptick from a year ago, the U.S. Census Bureau reported today. The dip in housing starts was driven by a 25% decline in multifamily construction activity. Permitting activity occurred at a seasonally-adjusted annual rate of 1.47 million, down 1% from July but roughly even with the pace from August 2019. Economists polled had expected housing starts to occur at a pace of 1.52 million and building permits to come in at a pace of 1.55 million.
Philly Fed Index Down: The Philadelphia Fed said today that its gauge of business activity in its region dipped in September. The regional Fed bank's index fell to 15 from 17.2 in August. Any reading above zero indicates improving conditions. This is the fourth straight positive reading. Economists polled had expected a 13 reading. However, the components of the Philly Fed index were stronger than the headline. The barometer on new orders rose to 25.5 in September from 19 in the prior month. The shipments index surged to 36.6 in September from 9.4. Inventories moved deeper into negative territory.The measure of the six-month business outlook rose 18 points to 56.6.
Import Price Index Up: The import price index advanced 0.9% last month, following increases of more than 1% in the prior two months, the government said Tuesday. Yet even after three straight increases, import prices are still running 2.8% below year-ago levels. The cost of imported fuel rose 3.3% last month, a much smaller increase than in July and June. Most economists predict inflation will remain low for several years until the U.S. and other economies regain their former strength. As a result, the Federal Reserve is prepared to keep a key U.S. interest rate near zero until well into the future.
Federal Budget Climbs: The U.S. budget deficit climbed by $200 billion in August to put the total gap for the current fiscal year over $3 trillion, a record increase reflecting massive government spending to keep the economy afloat during the coronavirus pandemic. The federal government spent $423 billion last month, the U.S. Treasury said Friday. It took in a much smaller $223 billion in tax revenue.
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Call me if you have any questions. I am always happy to help!
John J. Gardner, CFP®, CPM®
Blackhawk Wealth Advisors, Inc.
4125 Blackhawk Plaza Circle, Ste. 260 Danville, CA. 94506
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Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It's Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®)
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