We're Near the End of This Historic Run
U.S. stocks rebounded sharply on Thursday and leveled off on Friday following news that President Trump’s top economic adviser, Larry Kudlow, told Fox News that a “second-level” Chinese delegation will come to the White House for negotiations next week in hopes of restarting stalled trade talks between the two nations.
Kudlow downplayed the talks with China, saying he was more optimistic about making more headway with Europe and in Mexico. “We’re making great headway in Europe, making headway in Mexico. We’ve got a Chinese delegation coming next week, kind of second level delegation,” Kudlow said. “Maybe they’ll reopen those talks. I particularly am optimistic about Europe and Mexico.”
In any case, the stock market rallied on this news, along with a boost in Boeing and Walmart shares that helped the Dow 30 to rally sharply, helping the market defend the indexes off of the 50-day moving averages.
Walmart Sales Boom. Most of Retail in Dumps.
Walmart (WMT) surged over 9% Thursday after it reported $128 billion in quarterly revenue, but investors got excited when Walmart said its e-commerce sales jumped 40%. E-commerce is just a sliver of its business, but this news gave the Dow 30 some serious punching power on Thursday.
Most retailers are still really struggling, though. 4,379 stores have announced closing in 2018 versus 2,239 store openings, with Dollar General opening 900 stores. That’s a sign of stress in the retailers, when discount stores are basically the main stores opening. Even Walmart was one of the few companies that managed to make money in the last recession because of its cheaper products imported from China.
Currency & Commodities
The foreign currency market is short-term oversold. This is especially true in the those currencies that trade opposite the dollar, like the euro, the pound, and emerging markets, which means the U.S. dollar is overbought on a near-term basis.
Basically, if the dollar pulls back, this relieves some of the pressure on the foreign currencies and on the commodities for a few days. If oil prices rebound, it will spark another bounce in the stock market for a few days — but the U.S. dollar is solidly in a bull market.
We just had nine commodities hit 52-week lows this week. This kind of market deterioration is alarming.
Other Economic Data
When Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT) represent 70% of the performance of the S&P 500 index in 2018, market breadth is dangerous.
The stock market ignored the Philly Fed data, which showed a three-point pullback. The Philadelphia Fed Index dropped to 11.9 in August from 25.7 in July. That is the lowest reading in 21 months. The new orders index fell to 9.9 from 31.4.
This is just another signal that the economy is softening.
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We also learned on Thursday that after housing starts collapsed 12.9% in June, July was only able to rebound 0.9%, failing miserably to meet expectations of a 7.4% rebound. As interest rates rise, housing will continue to weaken. Investors are shying away from homebuilder stocks.
A combination of soaring home prices, which are back above the mid-2000s cyclical highs in many areas of the country, and rising mortgage rates is squeezing home affordability — peak housing is once again upon us.
As the yield curve inverts, you can count on further evidence of a softening in the economy and peak GDP.
We are beginning to see weakness develop in the economic numbers.
According to the National Association of Credit Management data, which measures manufacturing and services, July’s GDP proxy slowed by almost 1%-3% from June’s strong rate of nearly 4%.
The July ISM Manufacturing/Service growth proxy has halved to 2%. The July ISM Manufacturing survey for new orders fell to the slowest pace in 14 months.
The ISM Services missed big, falling to the lowest level in nearly a year. The ISM Services backlogs dropped to a two-year low in July to 51.5. Given we are in a service economy where 80% of the population resides, a services downturn is a sign of an economic slowdown.
Investors need to understand we are near the end of this historic run.
To your wealth,
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.
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