The WALL is Here

Climbing_the_Wall_of_Worry_-_Google_SearchBy David Nelson, CFA

President Trump said the “Wall is Coming” but for investors it’s already here. The Wall of Worry always looms large and this time around there’s no shortage of data and or rhetoric to stoke those fears. Ending the first few days of 2019 in the green was two steps this side of a miracle. On Wednesday, I was CNBC’s first guest of 2019 sitting down with host Dominic Chu. Before the camera’s rolled we were both looking at futures setting up for a miserable start to the year. Overnight, ISM numbers out of China indicated their first contraction in 19 months showing just how fragile their economy had become in the face of a trade war.

Like Rocky, stocks came off the ropes fighting their way back into positive territory only to be punched in the face with a profit warning from NASDAQ giant Apple (AAPL) shortly after the close of trading. CEO Tim Cook was quick to hit the air waves saying their problems were due to trade tensions with China.

china iphoneOf course, the ongoing trade war is a challenge for any firm doing business in China but like it or not Apple is facing huge secular headwinds that go well beyond any trade disputes. For starters they are trying to sell $1000 phones in a country where the average income is $15,000 per year. Last year the iPhone X sold well in China being their first edge to edge display device. This year’s version was a bust and rare product cycle miss with few additional features to entice anyone to fork over another $1000.

Smart phone saturation has been well documented. With the product cycle getting longer, growing the top and bottom line becomes even more of a challenge. Mr. Cook’s comments about seeing no need to give out unit data points to an arrogance toward investors. When revenue is challenged analysts and investors need more information, not less. Needless to say, the second day of trading didn’t go well with the tech heavy NASDAQ down well over -3%. The missed ISM Manufacturing numbers only added to the pain with U.S. markets ending near the lows of the day.

Day Three

Then we come to day three and a monster jobs report with revisions to the upside. When I first saw the +312k number I thought OMG, we’re going to be down 500. Investors will quickly look at the dark side believing the Fed will ramp up hawkish commentary and pick up the pace of rate hikes. That initial reaction was wrong!

Markets opened strong but the kick in the behind from Fed Chair Powell’s commentary later that morning was all it took to put the buy programs in motion. His comments were a 180 degree about face from the Jay Powell we heard last month. He had all the key buzz words saying the Fed would be “patient” and “flexible.” It was almost like they had run the commentary in front of a focus group to make sure they had just the right message. When the dust settled the Dow, S&P and Nasdaq were up 3.3%, 3.4% and 4.3% respectively. It was a hell of a run to save the week and give us a positive start to the year.

Shutdown, Walls and Wars

trade war score card

If you’re looking for a Trade War Scorecard look no further than the markets. The S&P 500 is coming off its worst year in a decade yet when put up against China’s Shenzhen A Shares we look like a relatively safe port in the storm. This weekend’s Wall Street Journal points out China manufacturing is hitting the lowest levels in 3 years. Putting a chart together for nearly any measure of economic activity on the mainland is easy. Just take a pencil, start in the upper left-hand corner and draw a line down and to the right. You can put a few zig zags here and there for authenticity but for the most part you’ll be right. The big question and one for any war is who has the staying power and resolve to hang in there for the long run? Xi has the distinct advantage of being President for life and knows that the United States thinks in terms of an election cycle.

Support becomes the new resistance

spx support resist

With the Shutdown in its 17th day (the record is 21) media focus will stay on the wall and trade tensions but for investors the focus will soon turn to earnings. As discussed in last week’s post Banks are first up and for the markets maybe the most important sector this year. The Financial Sector (XLF) was one of the worst performing sectors of 2018 beating only Materials (XLB). A lot of bad news is priced into bank shares with well below market multiples reflecting the concern. A flattening yield curve weighs on net interest margins but maybe more important this time around is loan growth. You can make the case that shares are being valued as though a recession is coming. Loan growth is key with many analysts having revised expectations to the downside. Like most things in life the devil is in the details and whether shares have already discounted the bad news?

It’s a start

spx zoom indavid wall 2

As pointed out in the chart above the S&P for the week put in a higher low and marginally higher high. Of course, very short term and could easily be undercut with just a day or two of negative trading action. Bottoms are a process. They only become a point in time looking in the rear view mirror.