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The Market is All About Tuesday

The Week Ahead: Comin’ Tuesday I’ll feel better

The human eye can only focus clearly on a 3-degree field of vision. That bit’s in pinpoint focus. The other 170-degrees of wide vision is there. It’s just more blurry. And so it is with markets right now. Politics trumps all. A decent earnings season, unemployment report and ISMs barely moved the market. Markets are focused on Tuesday.  Here’s what we noted last week.

1. Politics and Markets: Recent turns in the U.S. elections remind us of the 2000 election. This is what it looked like:

sp 500 bush gore 2000 and 2004

For every twist in the post-election recount and Supreme Court decisions (in the top left), the market dived. It was a full 11% correction. Then in January, job losses started, the Fed desperately started to cut rates. And the long-term trajectory was down. The market resumed where it was headed before the election. Down. Here’s 2016:

sp 500 2016 election

Only this time the market corrected around 4.5%. So less than 2000.

But the point is this: once the election is done, the market will start to focus on the wider issues. And most of the broader market and economic trends are better. Not overwhelmingly. But enough to resume what we think is a positive up trend. For what it’s worth, this is how we think of the election. The order is President/Senate/House and Democrat (D) and Republican (R). We omitted R/D/R because it’s not much different from R/R/R.


2. Employment: the job numbers came out on Friday. They were 161,000 and below consensus. Here they are:

change in non-farm payrolls and earnings

That’s probably enough for the Fed to raise rates in December. The other number shows wage gains. A respectable 2.8%, which is a little more than the 2.2% increase in real disposable income reported for September. The market liked the numbers but, again, the focal point for now is politics.

3. Inflation: there’s little around but investors are using cheap TIPS insurance. There has been a massive inflow into TIPS ETFs. We still think TIPS are cheap. Here’s the graph:

tips insurance

The broader the spread, the more attractive TIPS are. Right now they have dipped to 170bps. We admit there is only a tail risk of high inflation but there are two prices that matter to consumers: gasoline and health-related costs. And both are on the move.

Bottom Line: Corporate earnings are quietly ending. They’re up 2.6% year-on-year and as we mentioned last week would be stronger without Apple (down 20%) and Energy (down 80%). We like those numbers. Past Tuesday, we’ll have a clearer picture of how the market feels about this. And of course, we’ll look very carefully at Treasuries.

Other: 

Comin’ Tuesday I’ll feel better

San Francisco Janitor earns every penny of his $270,000

A modest proposal for fiscal stimulus

A 1000 years of border changes

 

–Christian ThwaitesBrouwer & Janachowski, LLC

 

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