foxex: The Bounce Back

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Markets erase early losses on Boeing sell-off to post best day so far in March.

Markets Close

Dow
25,650.88 +0.79%

S&P
2,783.30 +1.47%

Nasdaq
7,558.06 +2.02%

VIX
14.44 -10.03%

INV Anxiety Index
98.29 Low

US 10-Yr Yield
2.643 +0.69%

Stocks Rebound after Boeing Losses

U.S. markets posted strong gains - the first so far in the month of March - reversing early losses for the Dow Jones Industrial Average. The DJIA reversed its morning slide of more than 150 points, weighed down by shares of Boeing, which fell as much as 8% following the fatal crash of an Ethiopian Airlines flight over the weekend that killed 157 people. It was the second crash of Boeing's popular 737 jet in the last six months. Several countries, including China said it will ground 737 flights pending an investigation. The Federal Aviation Administration (FAA) did say that the 737 MAX is 'airworthy', but will continue to investigate.

How Could One Stock Weigh Down the Market?

Great question...The Dow Jones Industrial Average is a "Price Weighted Index". A price-weighted index uses the price per share for each stock included and divides the sum by a common divisor, usually the total number of stocks in the index. Turns out Boeing is a very heavy stock - in fact it's the heaviest of all DJIA components, at 14%. Here is a list of the rest, per IndexArb.

And here's another way of looking at it - just using today's performance. This, courtesy of Bespoke.

The 10 Year Rally in Perspective

As we said last week, March 9th marked ten years since the S&P 500 bottomed on the heels of the financial crisis before ripping upwards in a generational bull run that saw the index more than triple. There were bearish moments and cycles inside that rally, which is why there is a big argument as to whether it has been a ten year run or not. We won't resolve that here, but we can demonstrate just how important a handful of stocks have been to that rally.

Goldman Sachs charted it out, and the names leading that list should be very familiar to us all. As we often say, "It's a market of stocks, not just a stock market."

Trump Proposes a $4.75 trillion Budget

President Trump unveiled a record high $4.75 trillion budget today that calls for a 5% cut to federal spending. It also calls for $8.6 billion in funding for a Southern border wall, which the president has vowed to build since his candidacy. The budget also calls for a 5% increase in military spending - more than the Pentagon requested. The budget requests spending cuts for education and science of as much as 10%, as well as cuts to medicare, which would save $846 billion over a decade, in part through curbing what the administration calls "waste, fraud and abuse." The Trump administration also proposed spending $26 billion less on Social Security programs, including a $10 billion cut to the Social Security Disability Insurance program.

What the budget does not address is curbing the federal debt and deficit, which have ballooned under both the Obama and Trump administrations.

Why it Matters

This budget won't get passed given the Democratic control of Congress. We've known that all along. Think of it, instead, as President Trump putting a stake in the ground for his reelection campaign in 2020. In 2016 he campaigned on tighter border security, more military spending and big cuts to government entitlement programs. It worked. This budget embraces many of those same principles.

The Fed goes Prime Time

It's very rare for a sitting Federal Reserve Chair to be interviewed on national television. Ben Bernanke did it in the grips of the financial crisis to soothe the world's fears about a global financial meltdown. Last night, Jerome Powell took his turn on TV, sitting for an extended interview with CBS 60 Minutes. We are not in the midst of a financial crisis, and banks are healthier than ever, at least according to the Fed. Still, Powell thought it a good time to be interviewed by the most popular news program in the U.S.

Here are the key takeaways from the interview:

Rate Hikes: Powell says interest rates and monetary policy are in an 'appropriate place'. No hikes or cuts on the horizon.

Global Slowdown: It's happening - especially in China and Europe. Brexit could make it even worse.

Are we headed for a Recession? Powell dodged that question, but he did say there will be economic growth this year. He wouldn't touch 2020, though.

Cybersecurity: Powell says it's the biggest risk the Fed faces now, bar none. That's scary.

The Job Market: While Powell acknowledged that the U.S. job market is strong in terms of low unemployment and strong hiring (except for February), he did have concerns about the labor force participation rate in the U.S., which has been trending lower since 1990. He cited two reasons for it, and they are both really important.

1) Technology in the workplace is evolving and the U.S. is falling behind other countries in educating its current and future workforce.

2) The Opioid crisis. This surprised me, but it just shows how ignorant I am. Powell says the Opioid crisis in the U.S. is heavily impacting young and middle-aged men who should be in the workforce, but are either addicted to opioids or trying to recover from their addiction.

The National Institute on Drug Abuse says 130 people die every day in the U.S. from opioid addiction, and 1.7 million suffered from some form of addiction in 2017.

This is obviously a very serious issue affecting millions of people and their families. That's far more important than the impact on the U.S. labor force, but it does remind us that everything is connected.

Chart of the Day: British Pound Rises on Hopes for Brexit Delay

On Tuesday, the UK Parliament will vote for a second time on British Prime Minister Theresa May's deal outlining the terms of separation between the UK and European Union. May was already humiliated earlier this year when her Brexit deal was resoundingly defeated in Parliament. Needless to say, there are few expectations that May's deal will be passed this time around. If it is indeed rejected again as expected, another vote will be held on Wednesday to decide whether or not the UK should just leave the EU without a deal, otherwise known as a "hard Brexit." If that is also rejected, as it's expected to be, a third parliamentary vote will be held on Thursday to decide on whether to delay the Brexit deadline of March 29 (Brexit Day) for a few months. If the vote gets to this third stage, it is widely expected that there will indeed be a Brexit delay.

With potentially three votes this week that will help decide the fate of the U.K. economy, one of the key charts to watch this week will be the GBP/USD (British pound vs U.S. dollar). The pound rose sharply on Monday due in part to speculation that May's deal would be voted down again and there would ultimately be a postponement of Brexit Day. Generally, the pound has reacted negatively in the past to the overall prospect of Brexit, but even more so to the possibility of a hard Brexit. This is due to fears that a hard Brexit could inflict severe damage on the UK's economy. With market expectations leaning increasingly towards a Brexit delay after the three parliamentary votes this week, the likelihood of a hard Brexit on March 29 has diminished, alleviating some weight from the pound.

Of course, the votes have not taken place just yet, and anything could happen. The pound could even fall sharply this week, especially in the unlikely event that a Wednesday vote results in a hard Brexit on March 29.

From a technical analysis perspective, GBP/USD has just bounced off its 200-day moving average. Also, the 50-day and 200-day moving averages have just converged, with the potential to form a near-future "golden cross," which is a bullish technical pattern suggesting that the trend may turn up. If this indeed becomes the case, a further breakout above the 1.3300 resistance area would confirm that bullish turn. Whichever way the votes ultimately go, expect heightened volatility for the pound this week and in the run-up to Brexit Day.