foxex: Stepping out

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. U.S. markets slip as three-day rally falters

2. China's exports contract for fourth straight month

3. USMCA nears approval from U.S. Congress

4. Individual investors have been running from the stock market

Markets Closed

Dow
27,909.60 -0.38%

S&P
3,135.96 -0.32%

Nasdaq
8,621.83 -0.40%

VIX
15.86 +16.45%

Bitcoin
$7,394.45 -2.13%

US 10-Yr Yield
1.829 -0.71%

Markets Today

Friday's jobs report euphoria didn't last through the weekend as U.S. markets faded to start the week. There were no obvious catalysts behind the selling, but we are nearing the end of a historic year for U.S. equity markets and some investors may be inclined to take profits. The next two weeks are jam-packed with a boatload of uncertainty, namely the U.S.- China trade negotiations, the U.K. Parliamentary vote which could weigh on Brexit, the U.S. Federal Reserve meeting on interest rates this week, and holiday sales for retailers. That said, momentum has been strong for stocks despite the uncertainties, which have manifested in various forms throughout the year.

Headlines

The U.S. Mexico Canada Agreement (USMCA) is one step closer to becoming a reality as multiple reports indicate that U.S. Congressional leaders and the Trump Administration are close to a tentative deal. If they come to terms, it goes to the Democratic-held Congress for a vote as soon as December 18th. The USMCA will replace NAFTA.
China's exports in November contracted for the fourth consecutive month. Overseas shipments fell 1.1% from the same period last year according to customs data. Imports unexpectedly rose 0.3% from a year earlier, marking the first year over year growth since April. China's trade surplus for November stood at $38.73 billion which was lower than forecast and lower than the $42.81 billion surplus recorded in October.
China's Communist party has ordered all government offices and public institutions remove foreign computer equipment and software within three years, in a potential blow to the likes of HP, Dell and Microsoft, according to The Financial Times. The policy has been dubbed "3-5-2" because the replacement of the technology will happen at a pace of 30% in 2020, 50% in 2021, and 20% in 2022, the FT reported, citing a note from brokerage firm China Securities. Analysts estimate that there are 20 million to 30 million pieces of foreign equipment that need to be replaced in China.
Utility firm PG&E Corp (PCG) jumped 16% today after the announcement Friday that it had reached a $13.5 billion settlement with the victims of wildfires last year that killed 85 people. If approved by California governor Gavin Newsom, the company will have removed a substantial barrier to emerging from bankruptcy.

Investor Exodus

Despite U.S. markets hitting multiple record highs this year, individual investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange-traded funds in 2019. These are the biggest withdrawals on record, according to data provider Refinitiv Lipper, which tracks money flows.

Mutual funds account for most of the outflows. Roughly $220.8 billion has been pulled from stock-focused mutual funds this year, mostly actively managed strategies that have struggled over the past 10 years, according to Refinitiv. Meanwhile, $85.3 billion has flowed into equity ETFs, but those flows are at an eight-year low.

Institutional investors, which include pension funds, foundations, hedge funds, and multi-national banks, however, have been putting money into equity mutual funds and ETFs for 13 of the past 14 weeks, according to Refinitiv. Stock buybacks have also been a big contributor to inflows. Companies have been net purchasers of U.S. stocks as buybacks are expected to total $480 billion this year, according to Goldman Sachs.

The fact that individual investors have been sellers even as the markets have climbed to new highs has some strategists hopeful that U.S. markets still have more upside ahead if the U.S. and China move towards a trade agreement.

So, where have individual investors been putting their money as they have been pulling it out of stocks? Bonds and money market funds. According to Morningstar, in the third quarter, investors poured $225.2 billion into money market funds—the strongest quarterly inflows since the 2008-09 financial crisis. Money market funds have collected $529.8 billion in inflows over the trailing 12 months—the greatest they've seen in at least 10 years.

Before we go overboard with concerns that individual investors have been bailing out of the stock market in droves, we need some perspective on the kind of weight they throw around. While individual investors are heavily invested in the stock market through defined contribution plans like 401(k)s and IRAs, that money is considered institutional money since it is run by custodians like Fidelity and Schwab. What we are referring to is money that individual investors invest through their own brokerage accounts, outside of their defined plans.

Sentiment Trader, a well respected financial blogger, tallied the percent of total assets individuals represent in the overall market, and it's less than 2%.

R.I.P. Paul Volcker

Paul Volcker, the former Chairman of the Federal Reserve from 1979-1987 under both the Jimmy Carter and Ronald Reagan administrations, died on Sunday at the age of 92 years old. Standing 6'7 in socks, Volcker was a commanding presence with a deep voice and a no nonsense demeanor.

As Fed Chairman he used monetary policy to shock the United States out of a period of high inflation during the 1970's by bringing the country into a deep recession. That kind of a move seems impossible in today's political climate, but Volcker was hard to stop and the country needed bold moves.

Volcker came back to politics as chairman of President Barack Obama's Economic Recovery Advisory Board in 2009, formed in response to the 2008 financial crisis. He persuaded lawmakers to impose new restrictions on big banks — a measure known as the "Volcker Rule." (See more below)

After the bank bailouts, Volcker held fast to the new rules he helped create despite a flurry of opposition from the banks themselves, their lobbies and their biggest shareholders. Always immoveable, Volcker said these prophetic words in a testimony to Congress in 2010:

"I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate — I may not live long enough to see the crisis but my soul is going to come back and haunt you."

Paul Volcker Feb 3, 2010

photo Getty Images

More News:

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Charles Schwab Stock: A Top Pick for 2020

chart courtesy YCHARTS

One set of notable gainers today were energy companies, with Freeport-McMoRan, Apache, and Williams Companies gaining 3.8%, 3.3%, 2.8%, respectively. Another set were retailers with Nordstrom, Kohl's, and Macy's all up today by 3.6%, 3.3%, and 2.1% respectively.

Chemical company International Flavors and Fragrances fell 5.8% today, while medical device firm Abiomed fell 4.3%. Unlike the aforementioned Apache, not all energy companies did well, with Occidental Petroleum and Marathon Petroleum falling 4.3% and 3.0% today respectively.

Word of the Day
Volcker Rule
The Volcker Rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds. The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis.

Image Source: Cynthia Johnson / Getty Images

Today in History

December 9, 1906

Today in 1906 Rear Admiral Dr. Grace Murray Hopper, one of the most important figures in the history of computer programming, was born in New York City. After getting her PhD. from Yale she joined the navy during World War II and worked on the creation of one of the earliest computers, known as the Mark I. After the war, her programming team developed the first computer compiler, which translates mathematical problems into the binary 1's and 0's that computers can read. She then developed the first computer language to use english-language commands, as opposed to mathematical formulas. Additionally, she helped to popularize COBOL, the first standardized general business computer language, and helped to popularize the term "computer bug" after her team found an actual moth inside a computer. She retired from the navy at the age of 79 as a rear admiral and the oldest serving officer in the U.S. Armed forces.

Source: https://news.yale.edu/2017/02/10/grace-murray-hopper-1906-1992-legacy-innovation-and-service