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

Metals Step into Winners Circle

With the US government reopened (until February 15th) and rumors that the Fed will discontinue quantitative tightening, or QT, stocks were able to stage a rally that erased most of the week’s early losses. Those losses came from disappointing trade negotiations and/or corporate earnings that I believe ought to be characterized as low quality. Acquisitions and accounting gimmicks again obfuscated otherwise weak results. That said, though, bulls rewarded a few companies that “beat the number,” including Lam Research, Texas Instruments, and IBM, to name a few.

Significantly, however, up until the Friday news about the government and the Fed, none of the characteristic “bad news is good news” behavior was enough to lift the entire tape. The indices finished relatively unchanged for the week, but the bulls have momentum going into next week’s trading. At this point, the onus is on them to prove that a steady upward course can be maintained. Just about every rally, including Friday’s, has been met with consistent selling.

With the government shut down, economic releases were again limited. US existing home sales took a nosedive in December, falling 6.4% to lows not seen since 2013 and 2014. MBA mortgage applications fell 2.7% for the week ending January 18, and the Richmond Fed index registered -2 – well off its storm-related high of 29 at the end of September last year.

Away from this, Treasuries and sovereign debt in general were a bit firmer across the board in response to both the ECB’s and IMF’s forecasts for slower-than-expected global growth. Currencies flip-flopped, but the dollar was the worse for wear. It ended the week fractionally lower on prospects of restored stability (US government reopening) and Fed QT rumors. Dollar weakness helped the commodity sector to a minor breakout level on the charts, but the metals (on average) out-shined the entire group. Gold added about 1.67% to silver’s 2.63%.

I am still of the mind that the US economy is in the process of downshifting from a series of storm-related spending sprees and marginally restrictive financial/credit markets. All else, whether government squabbling, the China trade deal, or other such sound and fury, will eventually signify nothing – or at least not much. In the meantime, I suspect the metals will continue to advance in the presence of cost-push style inflation derived by dysfunctional cross-border capital flows and investment (i.e., unfunded deficits). Next week, Powell may address the QT rumors at the FOMC meeting on Wednesday, in addition to a stout backlog of economic releases and hopefully some progress on the China trade deal.

Best Regards,

David Burgess
VP Investment Management