It’s true that the trend is your friend, but what happens when there is no trend, and paranoid traders are trying to find cracks in the facade?
That’s where we find ourselves now. The S&P is up fractionally for the month, a few points from an historic high, and clearly remains in an uptrend.
But the momentum has faded. In the beginning of March, all of the major indices were in overbought territory. That’s no longer the case.
Wait, working off overbought conditions is generally considered positive —but not in the alternative paranoid universe many stock traders live in. Many are starting to get nervous, but I don’t see grounds for panic.
One concern is small caps — the Russell 2000 has been a poor performer most of this month, but that trend has largely reversed since the Fed meeting.
Transports are weak this month, down 3 percent, but most of that is due to the poor performance of airlines, mostly on capacity worries (too many seats).
More interesting is the trend in the 10-year Treasury. At 2.5 percent, it’s at the lowest level in nearly two weeks. The yield curve has been flatter. There’s been a predictable effect on bank stocks, which are down on the month. The Bank ETF (KBE) is at the lowest level since early February.
What’s going on? I’m not sure, but it’s been a joke for years that bond traders somehow, magically, know more than stock traders, so the stock guys think the weaker bond yields must mean that something is wrong.
What could that be? There are two worries:
- The main worry is that we are not getting much growth, nor will we in the near future. If true, this is a problem, since the markets have obviously priced in exceptional growth. They are taking at face value the claim by some in the Trump administration that they can get us from 2 percent GDP growth to 3 percent growth. On Friday, vehicle financing firm Santander Consumer reported higher delinquencies for the month of February, the stock was down 3 percent on the day; Ford and GM were also down 1.7 percent and 2.0 percent, respectively.
- The other worry is that the Trump Agenda may not all be passed, or that the changes could be less impactful than the market expects. It’s been widely noted that talk about a Border Adjustment Tax has abated, as has changing corporate interest deductibility. Without these, it would be impossible to pass a significant tax cut without dramatically increasing the deficit, so the implication is that a greatly watered-down tax bill reduction bill is coming.
Both of these are possibilities—they are in fact linked — but I think stock traders have been intimidated by bond traders for so long that they are not willing to consider a third alternative: that the bond guys are wrong.
Bond people have lived for years with little or no growth, and it’s quite possible they’ve gone without it for so long that they would not recognize real growth if they saw it.
My bet is this time the bond guys may be more wrong than the stock guys.
The Trump rally remains intact, and the economy is indeed improving. Just ask Janet Yellen. And she’s not even factoring in tax cuts or less regulations, as she pointed out at Wednesday’s presser.