Wall Street Salutes Midterms

Don’t look now, but all the major indices are higher and regaining momentum as we head into the remainder of the year.

• Dow Jones Industrial Average: +5.9%
• S&P 500: +5.3%
• Nasdaq Composite: +9.7%
• Russell 2000: +3.0%

Market Breadth

There were more 52-week highs than 52-week lows on the NYSE.

NYSE

• Advancers 2,281 - Decliners 733
• New 52-week highs 80 - New 52-week lows 52
• Up Volume 2.9 billion - Down Volume 906 million

NASDAQ

• Advancers 2,158 - Decliners 929
• New 52-week highs 64 - New 52-week lows 78
• Up Volume 1.8 billion - Down Volume 766.6 million

The Message of the Market

It was a monster session that gained strength throughout the day on Wednesday, sending several messages. I’m reluctant to use the word “gridlock” because that’s not necessarily what might happen. Pundits point to periods of strong markets and economies during a split government in the past, but they miss the fact that things got done.

President Reagan got along with Tip O’Neill and tweaked his approach, including seven tax hikes.

President Clinton worked with Newt Gingrich and pivoted in the middle.

It is hard to believe President Trump and Nancy Pelosi will develop a warm relationship even though they made nice yesterday. Nonetheless, the fact is, they don’t have to be best friends to get things done, and maybe the market senses that will be the case.

I’m just very reluctant to regurgitate the usual talking points spoken by folks that keep missing the rally and keep talking about things that simply aren’t a factor in the market. The crowd is so off-base now, blinded by personal animosity rather than focusing on the true message of the market.

The market didn’t explode because of spontaneous combustion. It rocketed higher because the economic agenda and building plans in the pipeline will continue. Meanwhile, President Trump’s trade hand got stronger with those giant wins in the heartland and key Democratic support.

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The rally couldn’t be derailed by a hostile press conference, or news of the long-rumored departure of Attorney General Jeff Sessions coming to fruition. The pent-up demand to be in this market simply broke the dam of anxiety and fear that built during the October sell-off.

Buyers moved into all sectors with a mix of chasing old favorites such as Amazon (AMZN), +6.9%.  And speaking of former U.S. Attorney General Sessions, marijuana stocks cheered his departure:

• Tilray Inc (TLRY): +31%
• Canopy Growth Corp (CGC): +8%
• Cronos Group Inc (CRON): +8%

There is a constant that has carried over from October, and it’s the hell stocks pay for the slightest miscue with earnings or guidance -instant carnage. It’s impossible for long-term investors to avoid some of these each quarter, and investors must dig in with those names that continue to have an attractive value proposition.

Bonds & Fed

Don’t look now, but the 10-year Treasury is nearing its 2018 high. This makes yesterday’s session even more impressive, as the two toughest periods in the market this year revolved around spiking yields and concerns about the Fed.

Yesterday, the Federal Open Market Committee (FOMC) wrapped up its two-day meeting. While the consensus shows there will be no action on rates, I’m hoping we will get clarity on how far rates might go to achieve the objective of Powell & Co.

#AskPayne?

@Martin C Brhel Jr

?Can U explain to your viewers what a "margin call" is? TY!

This is a great question because many believe this is a huge problem in the market.

According to the Financial Industry Regulatory Authority (FINRA), buying on margin is getting a loan from your firm to buy securities. When you buy securities on margin, you must repay both the amount you borrowed and interest, even if you lose money on your investment.

Margin Call

If the equity in your account falls below the maintenance margin requirements, your firm can sell the securities in your accounts to cover the margin deficiency.

In January, the FINRA warned about the record level of margin debt outstanding, but more importantly, how quickly it was growing to $100 billion in one year. That warning spooked the margin, and margin debt has been lower since.

The most important thing to understand is when bad investments go lower, the margin call means the brokerage firm will sell your winners. 

When this happens to you, it’s probably happening to a lot of other people as well, and it’s another reason why during major selloffs even great stocks get hit, too. 

It’s an interesting paradox that one mistake of picking bad stocks wipes out the otherwise good fortune of picking good stocks.  This is just part of the cautionary tale of borrowing to buy stocks.  

Click here to get additional #AskPayne questions

Today’s Session

There’s a lot going on nudging the needle this morning, but more than likely, the market will react mostly to the Federal Reserve.  Sadly, the last FOMC gathering will end without a press conference.  I’m not sure how the Fed signals major changes, or even subtle ones, but investors need answers.

Series of Unfortunate Events

• October 3, Powell says the Fed may “go past neutral… a long way from neutral at this point”
• October 9, IMF lowers its outlook for global GDP growth.
• October 17, Federal Reserve releases FOMC minutes, raises 2018 GDP to 3.1%, and 2019 to 2.5%, leaves 2020 unchanged at 2.0%.
• October 5, JP Morgan released a report saying Jay Powell had cost $1.5 trillion losses in market cap since taking over in February.  That number is certainly a lot higher and has maybe doubled since then.The question now is, will Jay Powell curb his approach or will he destroy the stock market even further?

The Fed is taking out $50.0 billion in “accommodation” each month, and it’s beginning to impact banks and influence the economy and stock market.  Coupled with reckless comments, and I contend the Fed is the biggest threat to the economy and stock market – nothing else is without miles.