Weak Economic Reports Didn’t Stop The Market From Rallying

Weak Economic Reports - Another Rally On Wednesday

S&P 500 increased 0.58% on Wednesday which was surprising to me because retail sales and industrial production missed estimates. Economic growth could end up being below 2% in Q2. That doesn’t correlate with a rising stock market. 

Headlines state the stock market rallied because President Trump delayed the auto tariffs. This was widely expected. To me, weak economic reports should move the market more than and a trade move that everyone thought would happen.

If the economy goes into a recession, stocks will be much lower and this small rally will be long forgotten. I’m not saying there will be a recession this year. But these negative reports and the ones from China, don’t paint a good picture of the global economy. This slowdown is why expectations for Fed rate cuts would probably increase. 

As you can see from the chart below, the expected mid-point of the Fed funds rate in November 2020 is 1.775%. That would be about 2 cuts. Ultimately, I see a recovery late in the year which prevents cuts. For the market to stop expecting cuts, the 2-year yield would need to have a powerful selloff.

(Click on image to enlarge)

Underlying Market Performance

Nasdaq increased 1.13% and Russell 2000 increased 0.34%. VIX fell 8.97% to 16.44. Probably because of the volatility earlier in the day, the CNN fear and greed index stayed at 35 which is fear. 

SOXX semiconductor ETF increased 0.77%. The best 2 sectors on Wednesday were communication services and tech which increased 2.11% and 0.98%. The worst 2 were the financials and materials which fell 0.48% and 0.24%. Financials don’t like the decline in treasury yields which occurred because of the bad economic data. The 10-year yield fell 3 basis points to 2.38% and 2-year yield fell 4 basis points to 2.16%.

As you can see from the chart below, the Merrill Lynch survey showed over 70% of fund managers think the 10-year yield will trade between 2% and 3% in the next year. That’s a pretty big range, so I’m not surprised by this result. Both bulls and bears can agree on this answer.  

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Gary Anderson 5 days ago Contributor's comment

I think the stock market going up in support of Trump. It is a phony rally and likely engineered. Trump cannot really win the trade war, so it is a delusional and pathetic display of American desperation. Sad.