foxex: When Bad News is Good News

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Stocks rise despite weak economic data

Markets Close

Dow
26,062.32 +0.46%

S&P
2,803.69 +0.69%

Nasdaq
7,595.35 +0.83%

VIX
13.54 -8.39%

INV Anxiety Index
100.32 Neutral

US 10-Yr Yield
2.755 +1.62%

Year-to-Date

Dow
26,026.32 +12.85%

S&P
2,803.69 +12.79%

Nasdaq
7,595.35 +15.35%

Russell 2000
1,589.64 +18.81%

Crude Oil
55.75 +21.70%

US 10-Yr Yield
2.755 +0.69%

GDP

Stocks rallied on Friday, ending a three day losing streak, despite weak economic data on both the consumer and manufacturing fronts.

The Institute for Supply Management (ISM) released a report showing U.S. manufacturing activity expanded at its slowest pace since November 2016. The University of Michigan consumer sentiment index came in below expectations for the month of February. Reports like these are usually enough to dampen investor sentiment. Not today.

There is no magic explanation for why stocks rise on a day with poor economic reports, but it's also worth noting that these reports are backward looking, while the stock market is essentially a bet on the future. The future bet in this case might be that more weakness in the economy may push the Federal Reserve to not raise interest rates again in 2019, and possibly even cut them. An interest rate cut is extremely bullish for stocks since it lowers borrowing costs for businesses and makes other investments like bonds, CDs and savings accounts less attractive. That's the world we lived in from 2009-2018, and the stock market went up more than 300%. That's how bad news can actually mean good news for the stock market.

Marching On

March came roaring in like a lion on the heels of an 11% gain for the S&P 500 for the first two months of the year. That's the best performance for the broader market since 1991. Historically speaking, March has been the second strongest month of the year on average, and April is no slouch, either. LPL Financial did the historic backtesting and it shows March's strength over the past 10 and 20 years.

Here's the chart.

Perspective

As I wrote earlier this week, historical records and patterns are interesting, but not worth taking to the bank. Anomalies happen and patterns get broken. Just because March has historically been strong doesn't mean you need to take any more risks than you're comfortable with.

This March is full of market moving events that could easily trip up this rally or cause extreme volatility, so we need to pay attention.

Here is a short list of the big ones:

Federal Reserve Policy Meeting - March 20, 21
European Central Bank Policy Meeting - March 21st
Bank of Japan Policy Meeting - March 14th
Brexit Deadline (tentative) - March 29th
U.S. - China Trade Discussions - Ongoing

What to Expect Next Week

February Jobs Report

Job creation in the U.S. has remained relatively strong over the past several months, especially in January when over 300,000 jobs were created. That number could be revised next week when the Labor Dept. reports non-farm payrolls on March 8th, but the trend has been robust. We'll be looking for signs of softness as the economy is slowing down. Plus, there's still uncertainty about the trade negotiations.

The weaker than expected manufacturing report and softness in consumer spending and sentiment are not great early indicators of a job market that will keep growing. However, companies do have a lot of cash on their balance sheets and could end up using it to add staff if the trade issue is resolved and the economy picks up steam.

10 Years of Bull

On March 9th, it will be 10 years since the S&P 500 bottomed. We were in the grips of the great financial crisis, and the U.S. government was taking extraordinary measures to bail out banks, buy up toxic assets, take interest rates to zero and rescue the economy.

It worked.

Look at these cumulative gains since then (as of February 28th):

S&P 500, +318%
Dow Jones Industrial Average (DJIA), +301%
Nasdaq Composite Index (IXIC), +494%
Nasdaq 100 Index (NDX), +580%
Russell 2000 Index (RUT), +359%
MSCI All-Country World Index (ACWI), +169%

We may never see another event like the financial crisis in our lifetime, nor the extraordinary measures governments around the world took to bail us out of it. There have been many moments in the past 10 years where pundits have predicted another crash (or worse) and implored investors to get out of stocks and stay out. That happens a lot, and it will continue as long as there are pundits and markets to make predictions about. We write about those because we think the perspective is important, but the predictions are just that: predictions.

Read More: Bull Market Turns 10

Nobody knows what the next ten years will look like or how the stock market will perform. History shows us that stocks (in the U.S.) rise about 6-8% per year, on average, for the past 100 years. Has the paradigm shifted? Maybe-but we won't know it until we are in the midst of it. 2019 looked terrifying at the end of 2018, but here we are, up 11% since the beginning of the year. You have to be invested if you want to participate in the upside.

Here's to ten years of Bull.

Chart of the Day: VIX Hits New Low as Market Fears Subside

As equity markets have made a dramatic rebound and recovery from late December lows, the Volatility Index, or VIX, has come down sharply from its highs. The VIX, also known as the "fear gauge," is a primary measure of fear and volatility in the markets as measured by S&P 500 index options volatility. As shown on the VIX chart, the big December spike in volatility mirrors the big December drop in stock prices.

But the VIX is well known for falling back rather rapidly after such overdone fear spikes, and December was no exception. By January, the VIX had fallen below its 50-day moving average, which is currently around the 19.50 level. And by February, below its 200-day moving average, which is currently around 16.50. As of the beginning of March, the VIX briefly broke down to a new low not seen since October.

While this demonstrates a high level of complacency in the markets at the current time, risk factors on the horizon remain. Particularly in March, U.S.-China trade, Brexit, the Fed decision, and slowing economic growth could all play a role in boosting the VIX once again.