Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Friday, Aug. 16. The Bottom Line segment of today’s podcast starts at (3:10) and Stocks on the Contrarian Radar at (5:54) for listeners who want to skip ahead.
State of Play
Stocks put in a big rally yesterday, their second one in three days, after retail sales printed well ahead of forecasts and initial jobless claims showed no uptick in unemployment. We also had Walmart (WMT 0.00%↑ ) earnings impress and management raise guidance. All in all, a very positive day. This would take its toll on the bond market, however…
As we look at our board of indicators for signs of direction at 0700, not an awful lot is going on:
Stock index futures are quiet. Only the Russell 2000 which tracks small caps is moving at all from the break-even point, up 0.3%;
Bonds are recovering a bit after yesterday’s sell-off. The 2-year yield is down 4 basis points to 4.06% whilst the 10-year is down 5bps to 3.89%;
Commodities are moving lower. WTI crude oil is down 2.5% to trade around $76/barrel. Copper is down 1%;
Cryptos are unchanged. Bitcoin trades around $58,300.
Today’s Known Events
Quiet summer Friday but we do get the first look at the University of Michigan’s Consumer Sentiment survey, out at 1000. Economists who were surveyed expect a reading of 66.7, basically in line with last month’s 66.4. Not sure if anybody has ever tracked this survey to see if it has any actual predictive power, but the market sometimes does pay attention.
We also get housing starts at 0830. The expectation here is for 1.34 million starts, in line with last month’s 1.35 million. Building permits are expected to come in a bit, to 1.43 million from 1.45 million. Part of this may be seasonal as nobody will want to start (or finish, or in any way be involved with) construction projects at the height of summer.
The Bottom Line
The S&P and Nasdaq have quietly (or not so quietly) closed higher for six straight trading days and are looking at the best week of the year (3% for the S&P, 5% for the Nasdaq). We’re still in a bull market, then. The sell-off we had two weeks ago appears to have been a blip. Mission ‘soft landing’ is back on and apparently more likely than ever.
This brings a brand new concern, which is that the Fed may not cut rates as aggressively as was initially believed. This is playing out in the bond market now. We’ll still get a cut in September, in all likelihood, but after that? If retail sales keep increasing from what was already a very high base and unemployment remains subdued, how can the Fed justify loosening monetary policy?
You’re going to want to keep an eye on Fed fund futures, which are still pricing in a 62% chance of an additional rate cut (after September’s) at the subsequent FOMC meeting, which is Nov. 7. That may not be very consistent with what the bond market is telling us.
We can worry about all that stuff at a later date. If the economy is strong and investors are buying risk assets, who needs rate cuts anyway?
Stocks on the Contrarian Radar©️
This all may be an opportunity to buy bonds and take out some insurance against another stock market freak out. There will be one at some point. Eventually one of these will stick and we’ll have a bear market.
For retail investors, the three main ETF proxies for bonds are iShares 1-3 Year Treasury Bond ETF (SHY 0.00%↑), iShares 5-7 Year Treasury Bond ETF (IEF 0.00%↑), and iShares 20+ Year Treasury Bond ETF (TLT 0.00%↑), tracking short-term, medium-term, and long-term bonds, respectively. These have been on quite a ride the last month:
You can see a big spike coinciding with the Friday/Monday freakout from a few weeks ago, followed by a return to earth, re-ascent, and then drop yesterday. If you zoom out to the year-to-date chart, you can see a longer-term pattern of recovery dating to late April:
If you think there is pain ahead for the economy, that the soft landing will prove elusive, and that the Fed will have to cut rates aggressively, then this could be your chance to buy bonds. They’re more expensive than they were in April, but cheaper than they were just a few weeks ago. If this stocks recovery proves to be a head fake and therefore elusive, you will be sitting pretty when things do turn to 💩.
Full disclosure: The Contrarian holds some IEF in his portfolio.
Housekeeping
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