Weighing The Week Ahead: Is Falling Confidence A Threat To Markets?

The economic calendar is more important than usual. There is an emphasis on housing data as well as reports on leading indicators, industrial production, and regional Fed surveys. The most important story of the week will be the Fed’s Wednesday rate decision. Market prices imply a high probability of a 25 basis point rate cut. Many market participants are counting on the Fed, but the real question is broader. Pundits should be asking: Is falling confidence a threat to markets?

Last Week Recap

In last week’s installment of WTWA, I asked whether it was time to worry about crowded trades. That was indeed the question on financial news to start the week, Hunting for Cheap Stocks is Back in Favor. A massive market rotation called into question much of the “wisdom” of the last few months. Interest rates rose, the yield curve steepened, and value stocks rebounded versus momentum. Now, of course, the popular question is whether this “has legs.”

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring the Investing.com version. It is static in this report, but if you go to the site you can use a number of interactive features. For those who want to explore the effect of specific events, there are news callouts.

The market gained 0.9% for the week. The trading range was 1.8%. The index chart conceals the biggest story – a massive rotation reflected by big sector moves.

News You Can Use

Dr. Brett Steenbarger’s new book is now availableRadical Renewal: Tools for Leading a Meaningful Life is innovative in both form and content. While he emphasizes traders, his work has implications for everyone. The format makes it especially user-friendly. When I finish reading, I’ll do a more complete review, but what I have seen so far is great. Dr. Brett has begun a series of regular blog posts on topics from his new book. It is an easy way to get started.

Noteworthy

The Visual Capitalist has several striking images of plastic bottle waste compared to major landmarks. The whole post is dramatic, and the final chart demonstrates the floundering efforts toward plastic recycling. This is a good example.

OK, I cannot resist including this image as well.

 

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

New Deal Democrat’s high frequency indicators are an important part of our regular research. The results remain positive in all three of the time frames, with improving readings. NDD notes that the long leading indicators are still “very positive.” His chief concern now is possible softness in Q3 earnings.

The Good

  • JOLTs showed continuing labor market strength, but the market is tightening. Some analysts look only at the total number of job openings. More important is the ratio of openings to job seekers and the quit rate. Both charts are from the excellent BLS collection.

  • Mortgage applications were up 2.0% versus the prior week decline of 3.1%
  • Initial jobless claims moved even lower, to 204K. This compares with the prior week’s 219K and expectations of 218K.0

  • Trade tensions softened a bit.

    • China halted the tariffs on pork and soybeans and resumed buying some pork.
    • The US delayed for two weeks the latest round of tariff increases. (Time).
    • Talks have resumed.
  • Retail sales for August showed growth of 0.4% beating expectations of 0.2%. July data was revised higher, from a gain of 0.7% to 0.8%. Brian Wesbury analyzes the data, explaining the basis for expecting strong sales to continue.

    Autos and non-store retailers (think internet & mail order), led the way rising 1.8% and 1.6% in August respectively. Non-store sales are up 16.0% from a year ago, sit at record highs, and now make up 12.8% of overall retail sales, also a record.The largest decline in sales in August was for restaurants & bars, which had a 1.2% decline, the largest drop since September of last year.This drop may have been due to the approach of Hurricane Dorian late in the month, in which case they should rebound in the months ahead.“Core” sales, which exclude autos, building materials, and gas stations (the most volatile sectors) were unchanged in August, but are up 4.5% from a year ago.And even with the flat reading in August, “core” sales are up 9.4% at an annualized rate since the start of 2019, the fastest eight-month pace of growth we have seen since record keeping began in 1992!

  • University of Michigan Sentiment (Sept. preliminary reading) increased to 92.0, beating expectations of 90.2 and August’s 89.8.
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Disclosure: [If your portfolio is loaded with crowded trades, it might be a signal for a checkup. How you did last week is one sign. Write for my free paper, 

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