 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. U.S. Markets Rally Late to Extend Records 2. 10-Year U.S. Treasury Yield Falls Below 2% 3. What's Behind the U.S. Proposed Tariffs on the EU?
Markets Closed
 U.S. Markets Rally Late to Close Higher
After spending the better part of the day in the red, U.S. markets rallied late, helping push the S&P 500 to a new record close. Volume was very light and will only get lighter as we approach the half-day session on Wednesday before the July 4th holiday.
The 10-Year U.S. Treasury yield dipped below 2% again this year, flashing another warning signal that the U.S. and global economies are slowing down. While Treasury prices have steadily climbed this year, yields have been tumbling with the 10-year sitting at a two year low. Today the yield on the 10-year had its biggest decline since the first trading day of the year.
Long-term Treasuries Outperform Stocks We've written a lot about the length of this bull market for stocks and talked about what could bring it to an end, but long-term Treasuries have actually outperformed stocks over the past year, and over the past 20 years.
chart courtesy Bespoke Investments  Why this Matters Remember, Treasury prices move inversely to yields. As yields have collapsed, especially over the past year, prices have soared. Yields, which are tied to interest rates, have actually been pretty low over the past two decades as the Federal Reserve has kept the Federal funds rate below 5% since 2001.
chart courtesy St. Louis Fed  That's been a big win for bond investors who locked in their yields when they purchased the bonds. On the flip side, long-term Treasury prices at these levels make them less attractive to new investors, since yields are so low. There isn't a lot of incentive—or risk/reward—to those securities now, except for the fact that U.S. Treasuries are considered one of the safest investments on the planet.
Read more: Understanding Treasury Yields and Interest Rates
Since many investors predict the Fed will lower rates at least once this year, yields on long-term bonds are expected to stay low. Low yields on long-term bonds can also be a recession warning indicator, and we know those lights have been flashing all year.
All this has been making the stock market look a lot more attractive than it should right now, especially given that corporate profits are set to decline. According to FactSet, the number of companies issuing negative guidance—AKA, telling investors that their earnings will be lower than previously forecast—is fast approaching the highest level since 1976.
chart courtesy factset  Buybacks Keep on Climbing
Another reason the market keeps churning higher is the record amount of stock buybacks we are seeing. Remember, companies buy back their shares when they think their stock is overvalued and they can't find anything better to do with their cash.
Read more: Why Companies Buy Back Their Shares
We saw U.S. companies buy back $85 billion worth of their shares in 2018, but we are on track to shatter that all-time record, given that we are already up 18% from this time a year ago.
Financial companies, whose stocks have been among the hardest hit in 2019, have been the most aggressive buyers so far this year, accounting for 35% of the total, per BofA. In a low interest rate environment, financial stocks tend to suffer, so this trend might have legs.
chart courtesy BofA  The Other Trade War
Just when the clouds were beginning to part on the U.S. China trade war, yesterday the U.S. threatened the E.U. with tariffs on $4 billion worth of imported goods. These tariffs are bound to wreck your next dinner party, since they target goods like Parmesan cheese, wines, champagne, whiskeys, and other delicacies.
Why? The tariffs, which are in addition to $19 billion in import taxes that were proposed in April, are tied to a dispute over what the U.S. says are illegal aircraft subsidies for Europe's Airbus. To be clear, this dispute predates President Trump being elected and stems from a decade old case decided by the World Trade Organization. The WTO ruled that the EU has unfairly subsidized France's Airbus to the expense of Boeing, its U.S. rival, which has harmed competition for aircraft sales to European carriers.
The U.S. Trade Representative will hold hearings on August 5th to determine whether to slap these new tariffs on the E.U.
Separately, but related, the U.S. has threatened to impose up to 25% import tariffs on automobiles made in Europe coming into the U.S., but has agreed to wait until November to decide on that matter.
Not to worry, the E.U. has threatened retaliatory tariffs of its own. Here's a list of the goods from the E.U. that could be hit.
You might say the U.S.-E.U trade relationship is a pretty important one.
chart courtesy Eurostat 
chart courtesy www.koyfin.com  The $1.26 billion in sales reported by real estate investment trust Welltower Inc. resulted in its stocks rising by over 3% today. Iron Mountain Inc.'s rose to similar numbers after Moody's Investor's Service upgraded the information management services company's rating outlook.  The hydrocarbon exploration company Apache Corp. has seen its stock fall steadily—by more than 6% today—after Hotchkis & Wiley Capital Management Llc reduced their number of shares in the corporation. Marathon Oil Corp. lost almost 5% after moving their operations out of the United Kingdom, part of a larger plan to leave multiple non-US countries that began in 2013.  Word of the Day Sam Stovall, chief investment strategist at CFRA, believes that the current economic expansion, which in July will become the longest in history, still has legs and will push stocks higher. Investors will have to endure the historically volatile third quarter in order to get there. His 12-month price target for the S&P 500 is 3100, implying a 4% upside from today's levels.
Price targets are defined as: "the projected future price level of an asset as stated by an investment analyst or adviser. The price target is based on assumptions about the asset's future supply and demand, technical levels, and fundamentals. For individual traders, who may develop their own price targets for the assets they are trading, the price target is where they will look to exit their position as the originally expected value of the trade has been recognized. Price targets may change over time as new information becomes available."  Today in History 1962: A struggling retailer from Kingfisher, Okla., opens an 18,000-sq.-ft. discount store in Rogers, Ark. His name is Sam Walton, and he calls his store Wal-Mart.
Sam Walton with John Huey, Sam Walton: Made in America (Bantam Books, New York, 1993), pp. 4, 56, 57, 59. Chart of the Day: Oil & Gas Companies Tank  Though OPEC and its allies have decided to extend crude oil production cuts for another nine months, which typically would be bullish for oil prices, both crude oil futures and shares of companies involved in oil/gas production and exploration fell sharply on Tuesday.
Driving the fall in prices has been the familiar fear that slowing global economic growth will continue to weigh on oil demand. OPEC members have reported falling demand growth for oil this year, and data from China to Europe to the U.S. have shown slower-than-expected manufacturing activity. The latest data show China and the UK in manufacturing contractions. And while the U.S. is still in manufacturing expansion mode, activity fell to nearly a three-year low last month. All of this points to the potential for significantly lower growth in demand for crude oil—and potentially lower oil prices.
As shown in the chart above, these concerns have clearly manifested in the falling share prices of companies involved in the exploration and production of oil and gas. The XOP ETF represents the major companies in this space, and its price has generally been in a sharp decline since late April due to both worries about lower demand as well as greater-than-expected supply inventories.
From a technical perspective, the price of XOP has just turned back down from key resistance around the 28.00 level, which is also around the key 50-day moving average. Within the context of the prevailing downtrend, this downturn from resistance could signify a potential continuation of bearish momentum, at least towards the next major support target of 24.00, which signifies the lows of late December.
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Tuesday, July 2, 2019
Mind the Dip
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