Tariff Concerns Fade Into Earnings – July 13, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Tariff Concerns Fade Into Earnings

Stocks enjoyed extended upside action as tariff concerns continued to abate. China decided to back away from any immediate retaliation to the latest US salvo – at least thats what the headlines said. However, I believe it was Chinas appeal (in its defense) to US lobbyists that gave traders the impression China was weak-handed in negotiations. In any case, stocks added between 1.5% and 2.0%, with tech shares leading the way.

The fact that earnings season is upon us also helped spur some enthusiasm, but hopes so far have not been realized. The banksthat first reported their earnings saw their shares discounted. JP Morgan in particular beat, with EPS growth of 47% from a year earlier, largely due to higher interest income (off of higher Fed target rates), and of course an aggressive share buy-back program. But it was loan growth of only 4.4% that had traders concerned as higher interest rates began to negatively impact loan volume. Citigroup and Wells Fargo also had similar resultsand market reactions. All of this leads me to believe Mr. Market may be ready to punish shares for organically shaky results,despite success at beat the number.”

Away from stocks, the speculation in oil may have come to an end – for now. US supplies are expected to inundate the market over the near term. Production, as a point of reference, is about 13.5% higher than it was in June of 2015 just prior to when the oil patch suffered its last crisis.” Treasuries were essentially flat, at least at the long end. The 2-year touched on an interim high of 2.59%, which produced a further flattening of the yield curve, now at 25.0 (down from 94.0 at year-end). The dollar gained a bit of ground in sympathy with stocks, which gave way to more discouraged selling in the metals. Both gold and silver lost about a percent, yet managed to maintain some technical integrity around their most recent lows. These performances were in spite of the fact that some of the inflation data released this week was off the charts, with the June PPI and CPI at 3.4% and 2.9% year-over-year, respectively. Remember, the Feds target is 2.0%.

With all that in mind, its still very clear to me that the media, the Fed, and Wall Street would have you believe that the Fed (or the economy) is responsible for where interest rates have gone since mid-2013 (i.e., straight up at the short end). In truth, the imbalances and dysfunction between supply and demand within the bond market have been the primary cause. In any case, as we get further away from the unusual number of disasters (consumer credit spiked 129% from April to May this year), I suspect the disconnect between rates, the Fed, and the economywill become more evident – and with it a break in the speculation fueling these markets. Next week well get a look at June retail sales, industrial production, and housing, along with a few earnings reports among firms in the Dow.

Best Regards,

David Burgess
VP Investment Management


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