Tuesday was a tough session for the market, which gave several messages beyond a knee-jerk reaction to events in Italy.
As for the situation in Italy, it goes beyond worries of banks holding Italian bonds that are getting hammered. In fact, the political aspect of this is remarkable. Italians voted in March, giving a major rebuke of an elitist dream of a big united Europe, run by the collective wisdom of unelected bureaucrats in Brussels, and beholding to the economic whims of Germany and the European Central Bank.
Italy’s Five Star is the controversial political party; it was once considered too ‘fringe’ to even win local elections, but it garnered the most votes in the March elections.
Meanwhile, Lega Nord (English: Northern League) erupted into existence in 1991 over the outrage of overpaying the majority of Italy’s taxes that only went to fund citizens in the southern part of the nation that received the majority of the nation’s welfare benefits.
Ironically, the top two vote-getting parties are actually more popular now.
Italy Political Polls | March | May |
Five Star | 32.2% | 29.5% |
League Party | 17.7% | 27.5% |
Sovereignty and Honesty Distribution of Effort
Italy has been a basket case for a long time, but there has been a general epiphany within its welfare policies and open borders; coupled with runaway spending, they have taken a devastating toll. At this point, even if they could get their own currency and central bank, it would be a tall order to right the ship without massive sacrifices.
That said, the Establishment on both sides of the Atlantic can try to intimidate folks by roiling markets, but there is a real wave of self-determination that won’t be deterred.
I have been talking and writing about this for a long time, and I’m surprised this powder keg hasn’t blown already. It’s not just about Italy. Workers and taxpayers throughout Europe are railing and pushing back against national systems that discourage working with lavish welfare and social benefits.
Meanwhile, U.S. markets reacted with the market swooning, the dollar strengthening, and plunging bond yields. Folks, the market moves day-to-day for any number of reasons, many which have nothing to do with fundamentals.
Please do not allow those that can sway markets short-term by triggering sell programs and investor stops that shake you out of the market.
S&P Sector Performance | Decliners | Advancers |
S&P 500 Index | -1.14% | |
Consumer Discretionary (XLY) | -0.73% | |
Consumer Staples (XLP) | -0.21% | |
Energy (XLE) | -0.31% | |
Financials (XLF) | -3.41% | |
Health Care (XLV) | -0.94% | |
Industrials (XLI) | -1.53% | |
Materials (XLB) | -1.69% | |
Real Estate (XLRE) | +0.26% | |
Technology (XLK) | -0.57% | |
Utilities (XLU) | +0.05% |
The S&P 500 banks and insurance companies were the biggest losers with Morgan Stanley being the biggest individual loser. I’m not sure how much is warranted, and what the exposure is to Italian bonds in European banks, but the action is a reminder that U.S. banks should have greater exposure to loans for small businesses and individuals in this country.
Bond Yields and Canaries in Coal Mines
Question: Remember when the 10-year Treasury yield was running away, and the Fed was going to have to hike rates 4 times this year?
Answer: Me either.
Actually, it was 3.11% back on May 17th; yesterday, the yield swooned to 2.78%. At one point, the yield curve (or ratio) to the 2-year yield had gotten to its closest point in months. Many consider this to be something of a warning of a recession. I’m not concerned - the U.S. economy is nowhere near a recession.
While there is a historical precedent that bonds can be the canary in the financial coal mine, all the hype over a 3.0% yield was a bridge too far. Moreover, when the world seeks safety, it comes rushing for our bonds and currency.
Investing Trends
That’s why there was some compelling action on the upside yesterday.
- Momentum keeps working: The semiconductors held firmly as Applied Materials (AMAT) and Micron Technology (MU) were higher all session long.
- Consumer Discretionary keeps working: Macy’s (M) finished higher, and Kohl’s (KSS) keeps bouncing after an overreaction to earnings.
- Value Investing looks attractive: Hormel Foods (HRL) and Clorox (CLX) were just some staples names that were higher yesterday.
I have to say that I understand general frustration with the market, which continues to move a lot more on things that are speculative and have very little to do with fundamentals such as Boeing (BA) getting hit on the latest verbal salvo in the China trade showdown.
However, sessions like yesterday can reveal where you want to be when the dust settles, and I think it’s a combination of riding breakouts and seeking value. Keep an eye on fundamentals.
Speaking of which, after the close, Salesforce.com (CRM) posted results that beat the Street as management offered confident guidance. The initial reaction saw shares up 5%.
Today’s Session
I continue to see a market struggling with insecurity that is largely the result of success. There is a gnawing feeling that things are so good that they can't get any better. This is why comments at the start of earnings season by the CFO of Caterpillar continue to haunt the market. Investors keep asking themselves is this the "high water" mark? Couple that with never-ending calls for pullbacks, corrections and general media negativity, and it has resulted in a weekly reason to panic.
The range of worry:
- Ten-year yield too high
- Ten-year yield too low
- Dollar too strong
- Dollar too weak
- Fear index too high
- Fear index too low
- Jobs growth too strong
- Jobs growth slowing
- Constitutional crisis
Political
- North Korea belligerence
- China trade war
- NAFTA trade war
All this anxiety while ignoring:
- Amazing earnings period
- Stronger than normal guidance
- Record job openings
- Historically low jobless claims
- Wages edging higher
Russell 2000 at record highs reflects strong and steady domestic economy.
Meanwhile the biggest winners last week were brick and mortar retailers FL, TIF and RL and DKS could be the number one performing stock today.
I don't know what propels the market out of this range, it will probably be a non-event, something that happens in a stealth-like fashion.
Morning Movers
Lots of retail earnings out last night and this morning, which all beat Wall Street consensus. Guidance is still the key, which explains why Kors and DSW shares are looking lower. Conversely, huge upside moves in retailers that were previously written off.
Dick’s Sporting Goods (DKS)
- Beat on revenue and earnings and management offered strong guidance, well above current consensus.
Movado (MOV)
- Beat on revenue and crushed on earnings with results that were $0.26 better than anticipated.
It’s interesting that May Consumer Confidence climbed to 128.0 from a revised 125.6 in April, and yet, it remains significantly below the all-time high reading of 144.7 back in 2000. This suggest a lot of room to the upside while underscoring the challenge of getting back there.
By the way, ‘present condition’ read of 161.7 is the highest in seventeen years, so we feel great about today and still worried about tomorrow.
I like the action before the open, but we aren’t going to force the issue. Look for more insight on ADP jobs and other data releases next time.
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