Stocks End Week Lower After Bond Market Fires Recession Warning
It was another wild week on Wall Street as the spooky R word (recession) returned for the first time in years. On Monday, several of the big U.S. banks came out and increased the chances of a recession occurring in the near future. That was the first time we have heard about a recession in years and that spooked investors. Then on Wednesday, the bond market inverted and that typically happens before a recession. The yield on the 2-year crossed above the yield on the 10-year which is not a healthy sign. That means, if you lend money to the U.S. government for 2-years, they will pay you more than if you lend the same amount of money for 10 years. The good news is that even with all this noise and the ongoing drama between Washington D.C. and Beijing, the S&P 500 is only 5% below its record high! In the near term important support is the 200 DMA line and near term resistance is the 50 DMA line, then 2019’s high.
Stocks fell on Monday after more negative headlines hurt sentiment. Protesters in Hong Kong caused turmoil and forced the Hong Kong International Airport to cancel all departures for the remainder of the day. A slew of big banks came out and lowered their growth forecasts after the recent increased tensions regarding the US-China trade talks. Goldman Sachs lowered its fourth-quarter growth forecast by 20 basis points to 1.8% as the firm no longer expects a trade deal before the 2020 election. Elsewhere, Bank of America raised the chance of a recession to more than 30% in the next 12 months as the firm believes many economic indicators are “flashing yellow.” Separately, Morgan Stanley believes the Fed will cut rates to zero in the near future. On Tuesday, stocks soared after the U.S. decided to delay some tariffs until December on China. Some of the items included cellphones and some clothing. The U.S. also removed some items from the list of new tariffs outright to help remove pressure on the economy. Some people view this as Trump “blinking” and legendary short-seller, Jim Chanos, asked, “Tell me why Xi should not continue to wait out The World’s Greatest Negotiator, who keeps ‘dealing’ with himself?” On Wednesday, stocks tanked over 800 points in the worst day of the year after the bond market flashed a recession warning. The bond market inverted which means the yield on the 2- year note crossed above the 10 year which usually signals a recession.
Thursday & Friday Action:
Stocks rebounded slightly on Thursday after China said that it would not fire back. In other news, Retail sales rose last month and beat the Street’s estimate. In other news, Walmart gapped up after the retail giant reported better-than-expected earnings and raised its outlook for the full year. Walmart saw growth in its core domestic business as well as online, marking the 20th consecutive quarter of sales gains in the U.S. Stocks rallied on Friday as bond yields retraced some of the recent move.
Market Outlook: Easy Money Is Back
Once again, global central banks showed up and juiced markets. The market has soared all year based on two key points: optimism that a trade deal will be reached between the U.S. and China and more easy money from global central banks. Earlier this year, the Federal Reserve reversed its stance and moved back into the easy money camp. Then, other central banks followed suit and that means easy money is back to being front and center for the market. Separately, the trade talks hit a hiccup and that is the primary reason for the recent pressure. As always, keep your losses small and never argue with the tape.