Insights & Advice

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Will record highs beget record highs?

As third quarter earnings wind down, the Fed cut interest rates again this week. Since both events seemingly matched investor expectations, what, then, will investors worry about in the coming months?

As predicted, the S&P 500 Index hit a modest new high this week based on the central bank’s one quarter-point cut of the short-term Federal Funds interest rate on Wednesday. Robust earnings from certain favored companies, like Apple and Facebook, also helped sentiment and so the averages ground higher.

“You would think,” said one miffed investor, “that after two years trapped in a trading range, we would have had a little more enthusiasm over this break-out.”

Instead, traders simply took it in stride and actually took profits. One reason for the lack of enthusiasm could have been that investor sentiment was already bullish. The averages simply confirmed what we all expected would happen. Investor sentiment seems to confirm that.

The U.S. Advisors Sentiment indicators released this week had market bulls pegged at 54.2% versus 52.8% last week. From a contrarian point of view, any reading above 50% should invoke some caution among the trading crowd. At the same time, the number of pros who are expecting a market correction declined to 28% from 29.3%. Readings under 30% also signal a more cautious approach to the markets.

On the plus side for the markets, we are now over the September-October period when stocks usually do their worst. November through January is normally the best of the best months for positive stock market performance. The question is whether historical data matters at all, given markets where politics mean more than fundamentals.

The trade war, in my opinion, will continue to cast a sobering shadow over the stock markets in the months ahead. As readers are aware, I thought this ‘skinny’ deal between China and the U.S. was a joke. It seems that more investors are now realizing the same thing.  The president’s latest “phase one trade deal” is much more a public relations stunt and less a meaningful breakthrough. The Chinese seem to agree.

The hope of signing even this paltry deal has now been postponed, since Chile canceled the upcoming November conference (due to political unrest) where Xi and Trump were supposed to meet, greet and sign the deal. Investors worry and wonder whether any deal will be signed at all. In my opinion, it is simply more of the same drama we have been putting up with for the last two years.

Thursday, for example, “unnamed officials” in China let it be known that they did not hold out much hope that any substantive deal with Trump would ever be signed. The markets dropped immediately. So, what’s next? We should expect either Trump (through tweets or an impromptu Q&A with the fake news) or some administrative official (it is usually former CNBC fake newsman, Larry Kudlow) to run out and to assure us all that everything is just perfect, that the economy is great, that negotiations are going better than expected, yada, yada, yada.

It comes down to this: investors and the nation are ping pong balls in this global trade game. How you deal with that depends on your level of cynicism. Should you believe those “no good Chinese,” or in the honesty and sincerity of the self-described “greatest president in the history of the United States?”

Aside from that drama, we have the impeachment inquiry that is heating up and coming to the attention of more and more Americans. I expect that Trump, in an effort to strike back at the Democrats and change the focus of the nation away from impeachment, may create a confrontation with the outcome being a possible government shutdown later this month. I warned readers in my column last week that there is a high probability that the president will use funding for his wall as a pretext to shut down the government once again–just in time for Thanksgiving.

Posted in A Few Dollars More, At the Market