Stocks were flat on Tuesday but remain buoyant as the bears seemed to have started their holiday vacations already. The Dow gained 31-points while the S&P 500 was basically flat. The small caps out performed, and a rally in the dollar finally slowed down the I-fund. Bonds were up slightly.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TABLE="align: center"]
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TD]
[/TR]
[/TABLE]
After hours FedEx reported disappointing earnings and the futures slipped into negative territory so there could be a slight drag on the indices to start the day on Wednesday, particularly the economically sensitive Transportation Index.
If I didn't bore you enough yesterday with the yield curve talk, I might take care of that today, but I'll try to make it quick.
Yesterday I posted an old chart of the 90-day / 10- year yield curve so today I'll show the current chart, plus the chart when the curve inverted before the Great Recession. Again, I do not think anything like 2008 is going to happen, but history suggests that the yield curve inversion means something, and that is that a recession or slowdown in some form is likely in the coming year or so.
First off, what does an inverted yield curve mean? It means long term bond yields are lower than short-term bond yields, which is the opposite of what is "normal." You wouldn't expect to pay a higher rate on a 10-year loan than you would for a 3-month loan, but that's what's happening and it suggests short-term concerns for the economy, with short-term meaning much shorter than 10 years in this case.
So again here's that 90-day / 10-year yield curve inversion in 2006 - 2007, and what was happening to the S&P 500 at the time. That is, the S&P 500 was making new highs in late 2017 after the yield curve had already steepened again, or "uninverted."
I remember in the summer of 2008 when stocks started pullback some in July, John McCain was running for president and the stock market was coming off those 2007 highs and he was asked about the state of the economy, and he said the fundamentals of the economy were "strong." Of course they weren't at the time, but the data lags.
Everything always feels great just before the bubble bursts. Often the economic numbers don't really start to turn until after the stock market has already reacted. In other words, the market will likely be down sharply before we get any evidence that we are in a recession, or some kind of slowdown is upon us. Waiting for the data is too late.
There were a lot of contributing factors to bring the market down back in 2008, and that is an extreme example. My point is, and I know I'm repeating myself, we got the first warning sign earlier this year when the yield curve first inverted in March 2019. Just because that inversion no long exists, doesn't mean the effects of it aren't still churning - just like the lag in 2006 into 2008.
That said, stocks are still rolling along and we're heading into the seasonal period that tends to be very favorable for stocks. It wasn't last year, and even in 2017 the week after Christmas was weaker than the seasonal averages, as we talk about yesterday. But I doubt the bears are going to make too much of an effort to do anything between now and the end of the year. Maybe a stall to slight dip. It may not be until the New Year starts that we get a better feel for what's up for 2020.
The writing is on the wall for some kind of trouble, even though things feel really good right now. That's why many folks get trapped when the trouble starts, but it's part of the business cycle that's been going on forever.
The trade deal helps and being an election year, we could see some efforts from the administration to keep things hot, but 2008 was also an election year and because of the size of the U.S. economy, it is not easily manipulated.
The Fed cut the Fed Funds Rate seven times from September 2007 to April 2008 before the stock market eventually fell apart back then, so the recent rate cuts probably won't prevent what is coming.
Again, I'm not talking about a crash or anything like that. I actually love the look of the long term S&P 500 chart. But an economic slowdown / recession could keep the 2020 return of the S&P 500 in singe digits for the year, and to me that means we'll be looking for trading opportunities rather than just holding on and accepting that.
The S&P 500 (C-fund) was basically flat on the day but the 1-point gain meant it made a new all-time high, and of course the media is excited about that, but why not? The resilience of the market has been remarkable. We may have a little "F" flag slowly moving higher (that's an Oscar Carboni-ism) and it wouldn't be a total shock to see it drift higher into the end of the year, although the market likes to put you to sleep before surprising you.
The DWCPF (S-fund) was up nicely on the day closing at a new 52-week high, and also continues to creep toward the summer of 2018 all-time highs (not shown here). The channel is rising and seasonality is on its side, but it is getting extended after the 2-month rally.
The EFA / I-fund was down sharply on the day after hitting resistance, as we finally saw the dollar move higher.
The dollar actually may have broken out above a falling wedge pattern yesterday so it will be interesting to see if the trend changes going forward.
The High Yield Corporate Bond Fund may be starting a parabolic move as it recently broke above some long-term resistance. Corporate debt has long been considered in a bubble, but those bubbles seems to always go on a lot longer than anyone anticipates. But when they burst, look out.
The AGG (F-fund / bonds) was up slightly on the day and the bull flag remains intact. How do I know that this is a bull flag and not another peak? Well, I don't for sure, but the angle of the pullback is a clue. You can see the difference between the current pullback and the declines from the prior peaks.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
[TABLE="align: center"]
[TR]
[TD="align: center"] Daily TSP Funds Return
[TR]
[TD="align: right"] [/TD]
[/TR]
[/TABLE]
[/TD]
[TD][/TD]
[TD="align: center"]
[/TR]
[/TABLE]
After hours FedEx reported disappointing earnings and the futures slipped into negative territory so there could be a slight drag on the indices to start the day on Wednesday, particularly the economically sensitive Transportation Index.
If I didn't bore you enough yesterday with the yield curve talk, I might take care of that today, but I'll try to make it quick.
Yesterday I posted an old chart of the 90-day / 10- year yield curve so today I'll show the current chart, plus the chart when the curve inverted before the Great Recession. Again, I do not think anything like 2008 is going to happen, but history suggests that the yield curve inversion means something, and that is that a recession or slowdown in some form is likely in the coming year or so.
First off, what does an inverted yield curve mean? It means long term bond yields are lower than short-term bond yields, which is the opposite of what is "normal." You wouldn't expect to pay a higher rate on a 10-year loan than you would for a 3-month loan, but that's what's happening and it suggests short-term concerns for the economy, with short-term meaning much shorter than 10 years in this case.
So again here's that 90-day / 10-year yield curve inversion in 2006 - 2007, and what was happening to the S&P 500 at the time. That is, the S&P 500 was making new highs in late 2017 after the yield curve had already steepened again, or "uninverted."
I remember in the summer of 2008 when stocks started pullback some in July, John McCain was running for president and the stock market was coming off those 2007 highs and he was asked about the state of the economy, and he said the fundamentals of the economy were "strong." Of course they weren't at the time, but the data lags.
Everything always feels great just before the bubble bursts. Often the economic numbers don't really start to turn until after the stock market has already reacted. In other words, the market will likely be down sharply before we get any evidence that we are in a recession, or some kind of slowdown is upon us. Waiting for the data is too late.
There were a lot of contributing factors to bring the market down back in 2008, and that is an extreme example. My point is, and I know I'm repeating myself, we got the first warning sign earlier this year when the yield curve first inverted in March 2019. Just because that inversion no long exists, doesn't mean the effects of it aren't still churning - just like the lag in 2006 into 2008.
That said, stocks are still rolling along and we're heading into the seasonal period that tends to be very favorable for stocks. It wasn't last year, and even in 2017 the week after Christmas was weaker than the seasonal averages, as we talk about yesterday. But I doubt the bears are going to make too much of an effort to do anything between now and the end of the year. Maybe a stall to slight dip. It may not be until the New Year starts that we get a better feel for what's up for 2020.
The writing is on the wall for some kind of trouble, even though things feel really good right now. That's why many folks get trapped when the trouble starts, but it's part of the business cycle that's been going on forever.
The trade deal helps and being an election year, we could see some efforts from the administration to keep things hot, but 2008 was also an election year and because of the size of the U.S. economy, it is not easily manipulated.
The Fed cut the Fed Funds Rate seven times from September 2007 to April 2008 before the stock market eventually fell apart back then, so the recent rate cuts probably won't prevent what is coming.
Again, I'm not talking about a crash or anything like that. I actually love the look of the long term S&P 500 chart. But an economic slowdown / recession could keep the 2020 return of the S&P 500 in singe digits for the year, and to me that means we'll be looking for trading opportunities rather than just holding on and accepting that.
The S&P 500 (C-fund) was basically flat on the day but the 1-point gain meant it made a new all-time high, and of course the media is excited about that, but why not? The resilience of the market has been remarkable. We may have a little "F" flag slowly moving higher (that's an Oscar Carboni-ism) and it wouldn't be a total shock to see it drift higher into the end of the year, although the market likes to put you to sleep before surprising you.
The DWCPF (S-fund) was up nicely on the day closing at a new 52-week high, and also continues to creep toward the summer of 2018 all-time highs (not shown here). The channel is rising and seasonality is on its side, but it is getting extended after the 2-month rally.
The EFA / I-fund was down sharply on the day after hitting resistance, as we finally saw the dollar move higher.
The dollar actually may have broken out above a falling wedge pattern yesterday so it will be interesting to see if the trend changes going forward.
The High Yield Corporate Bond Fund may be starting a parabolic move as it recently broke above some long-term resistance. Corporate debt has long been considered in a bubble, but those bubbles seems to always go on a lot longer than anyone anticipates. But when they burst, look out.
The AGG (F-fund / bonds) was up slightly on the day and the bull flag remains intact. How do I know that this is a bull flag and not another peak? Well, I don't for sure, but the angle of the pullback is a clue. You can see the difference between the current pullback and the declines from the prior peaks.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
