10 Years and 10 Weeks

The explosive rally to start 2019 has reached stall speed in March. 2800 S&P has proved to be formidable resistance. That level equates to approximately 26K on the DOW. Money has been flowing back into the Bond Market, seeking some safety. Gold has been a recipient too. Keep in mind, this was the strongest start to a year for the US Stock Market in 3 decades. After a freefall to end 2018, the first two months of 2019 skyrocketed higher. Stocks went from deeply oversold to overbought in short order. Complacency set back in. It’s often a warning sign as a contrarian indicator. The extreme Bearish sentiment in December completely evaporated, leading to the highest levels of Bullishness in a year. Panic sets in at Market lows, while complacency and enthusiasm influence tops. Bottoms tend to get formed quickly, as fear triggers capitulation. Tops are a longer process because making money can mask underlying problems. It’s almost like people forgot about December. We certainly did not. The overbought condition is getting burned off a bit. It was overdue. We have been selling some positions the last couple of weeks. We plan to buy lower. We expect more back and filling ahead. It’s all part of the process.

Contributing to the weakness was a surprisingly weak job report for February. Only 20,000 jobs were created. 180,000 were expected. Weather was blamed, which has some validity. Extreme cold and wetness blanketed the nation for several weeks. That certainly put a freeze on construction and other building and manufacturing oriented employment. The Trade War and the Government shutdown no doubt played a role too. But the fact is, economic activity is slowing. It’s slowing from the torrid pace in the US last year. It’s slowing even faster from an already slower pace overseas. The Stock Market’s torrid pace has slowed too.

The Trade War continues to put pressure on the global economy. China is feeling it big time. Growth is slowing much faster than anticipated. Chinese exports fell 20% in February, well below the roughly 5% drop expected. Some have warned the timing of the Lunar New Year made it tough to draw a true signal from the data, but the size of the miss was indeed surprising. China’s February trade balance was also significantly weaker than expected at just over $4 Billion. This was shockingly lower than the $26 Billion expected. For perspective, China’s trade balance in January had been $39 Billion. To say it was a steep drop is an understatement. China has started aggressively stimulating their economy to stem the slowdown. It’s also being reported that a deal on trade between China and the US is far from imminent. The White House seems to be greasing the wheels for the possibility that a deal doesn’t even get done. That’s new. The Market has gone a long way to price in some sort of deal, good or not.

Europe is in even worse shape. Economic growth is stalling. The European Central Bank slammed the brakes on its tightening of monetary policy and did a hard U-turn. The ECB said it would offer more cheap loans to banks and keep interest rates at record lows for longer, as a weakening economy derails its plan to withdraw stimulus. The German 10-Year Bund rate is back near zero. The central bank also slashed its estimate for GDP growth in the European Union, from 1.7% down to 1.1%. This is the second time they’ve cut estimates in 6 months. Inflation is a non-issue and threat of recession has become a big one. Italy is already in recession. Germany, Europe’s growth engine, is at risk. Pressure from global trade tensions and Brexit have left the euro-area economy very vulnerable.

This is all happening as the secular Bull Market celebrates its 10th anniversary. It was exactly a decade ago when the S&P touched that 666 cycle low. That number really stands out. The DOW was at 6500. That was such a dark and brutal time. I will never soon forget. None of us will. In many ways, the wounds are still raw. But we got through it together. Since the March 2009 lows, the S&P 500 has soared over 300%. It’s also referred to as the most hated Bull Market in history, because of its lack of trust throughout. There was so much damage done during the Financial Crisis. It was a scary time. It tested everyone’s mettle, conviction and character.

Ironically, this is also the week the New York Stock Exchange was formally founded, in 1817. That was 25 years after the Buttonwood Agreement was signed near the corner of Wall and Broad. It has quite a history. History continues to be made. A lot has happened in 10 years. Heck, a lot has already happened in the first 10 weeks of this year. Things move so fast today. We don’t panic at lows and we don’t get euphoric at highs. Our approach is to remain objective at all times, and focus on facts. History has proven that’s the right approach. History has also proven it’s never easy.

Have a nice weekend. We’ll be back, dark and early on Monday.


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