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

Stocks Really Can’t Defy Gravity

Well, interest rates finally mattered to Wall Street this week. The Dow shed just over 1,100 points, or about 4.2%. Dow stocks were also under pressure from the effects of tariffs, which made the Dow the worst performer among the major indices. This is uncharacteristic of meltdowns, where the NASDAQ or higher beta stocks typically lead. In any case, stocks managed a small bounce on Friday after a volatile morning, and gained upside momentum when Turkey decided to release American pastor Andrew Brunson. Treasuries on the other hand gave up a four-day winning streak and fell sharply into the close on Friday as stocks rallied. This, I believe, is an important distinction, and it’s a point I’ve made here before. Rates must head meaningfully lower in order to fuel a real rally. Otherwise stocks will most likely be biding their time before the next decline.

The economic data took a back seat to interest rates in terms of the aforementioned market action. Still, there was some debate over the September CPI (0.1%), PPI (0.2%), and Import Price data (0.5%). The CPI was below, the PPI met, and the Import Px index exceeded expectations. The latter may have been skewed by storm spending and front-loading imports to avoid escalating tariffs. Lower inflation and stock market data will of course put more political pressure on the Fed to back away from its planned interest rate hikes. Personally, I expect that to happen at some point, but neither the data nor Fed speakers Evans and George this week gave traders a reason to expect a policy change.

Turning back to the action, most world debt ex the PIIGS was firmer across the entire curve, with no real change in term premiums (the spread between the 2- and 10-year Treasuries is at 31bps). Commodities in general maintained some intrinsic integrity as higher rates have started to produce longer-term inflation expectations. Even though oil lost about 3.8%, it remained comfortably above its 50-day moving average while most stock indices finished below their 100-day MAs. The metals also showed some signs of strength as gold added 2.4% to silver’s 2.0% during Thursday’s trade, with dollar weakness contributing.

Banks JP Morgan, Citigroup, and Wells Fargo all reported Friday, but failed to inspire away from their earnings “beat.” Lending still leads the list of concerns amid rising rates. Next week we’ll hear more about the economy with the release of housing and industrial production data. Storm spending is still expected to make things look a bit better, but at half last year’s pace it will make year-over-year corporate earnings growth/comparisons rather challenging.

Best Regards,

David Burgess
VP Investment Management