S&P 500 2% From Its Record High

S&P 500 - Another Rally, But Why?

The S&P 500 stock market rallied again on Monday as my bearishness in the past couple trading days has been misguided. I’m open to the possibility that this will be like 2016 when the economy turned around after a tough slowdown, but I don’t see evidence of that yet. The only major economic report to come out was the JOLTS which showed data from April.

There were few earnings reports because it’s not earnings season. The main trade news was that President Trump stated he would enact more tariffs on China if President Xi doesn’t meet with him at the G20 summit.

It’s great that Trump wants a meeting. I can’t imagine why Xi wouldn’t want to meet. It’s possible Trump knows Xi will meet with him. Therefore, he’s framing it as a victory if he does meet with him.

There wasn’t much news to move markets, yet they increased on Monday.

S&P 500 - Personally, I wouldn’t buy a market that’s up substantially month to date despite the lack of a trade deal with China and a slowing economy. There’s also uncertainty on monetary policy, since it’s not clear what the Fed will do this year.

Investors don’t see stocks increasing if the Fed guides for one cut in 2019 since the Fed funds futures market shows there is a 97.7% chance of a cut this year.

While it’s possible the Fed cuts rates twice this year, it might not guide for that just yet because its previous guidance didn’t call for any cuts. 2 cuts would be a big change in policy. Those calling for a rate cut next Wednesday will be incorrect as there is only a 16.7% chance of a cut.

If the market expected a cut and the Fed didn’t deliver, there would be a decline like last December.

S&P 500 - Specifics Of Monday’s Action

On Monday, the S&P 500 increased 0.47%, the Nasdaq increased 1.05%, and the Russell 2000 increased 0.61%. S&P 500 is now only down 2% from its record high in April.

In the past 5 days, the Nasdaq is up 6.68%. Big internet stocks are recovering from the regulation scare a couple weeks ago as if it didn’t happen. Amazon stock is up 9.92% in the past 5 days.

Personally, I don’t see how bad news being priced in for a few days makes it go away. The recovery rally has been much stronger than I expected.

VIX fell 2.21% to 15.94. Much was made about the increase in the VIX early in the day. If it closed higher, it would have been the first time the VIX was up over 3 sessions while the S&P 500 increased 2% since 2009.

VIX’s action is slightly disconcerting.

S&P 500 - But I’m bearish because of the weak economic reports and the trade war with China, not because of the VIX. The CNN fear and greed index had a big 5 point spike higher as it is at 37 out of 100 which is ‘fear.’

The fact that it’s at ‘fear’ with the market down just 2% since the April high is amazing to see. Some of the wise traders I follow are bearish, but I wouldn’t bet against them like I would fade the crowd.

It was another classic ‘risk on’ day for S&P 500 sectors as the consumer staples sector was flat, real estate was down 0.3%, and the utilities were down 0.6%. The best 2 sectors were consumer discretionary and tech which increased 1.05% and 0.98%.

Solid JOLTS Report

S&P 500 - April JOLTS report showed job openings fell slightly from 7.474 million to 7.449 million This beat estimates for 7.4 million. This solid report makes sense because headline job creation was strong in April.

There might be slight weakness in May because of the weak BLS report. The disappointing part of the JOLTS report has rarely been job openings; it has been hirings which haven’t kept up with openings.

There were 5.937 million hirings in April. This is unlike most of the reports this cycle as hirings have lagged openings. That's how the difference between the 2 got to a record high. Quits were up 21,000 to 3.482 million.

Quits rate was unchanged at 2.3%. There were 5.824 million unemployed people actively looking for work and 10.933 million people in the total available labor pool. This includes people who want a job, but aren’t actively looking for work.

S&P 500 - The Rent Is Too High

Now let’s look at a longer term chart since there weren’t any other economic reports on Monday. The chart below shows rent as a percentage of disposable income for renter households.

While housing got more affordable after the housing bubble burst, rent has only gotten more expensive. This is by far the highest percentage since 1967. For much of this cycle, the homeownership rate fell because people switched to renting.

Scary part is now people can’t even afford to rent. When a mortgage payment is 40% of disposable income for a buyer, it’s a red flag. Renters are close to that threshold on average.

It would be nice if home price growth continued to fall so some of these renters could afford to buy a house. However, for those millennials with student loan debt, it’s tough to save for a down payment.

This chart is a great explanation as to why shelter inflation has carried overall inflation for much of this expansion.

It is often discussed how the consumer has deleveraged this cycle.

S&P 500 - Many of these renters wouldn’t mind taking out mortgage debt because it provides cost certainty unlike rent which increases over time. Mortgage debt isn’t a bad thing. It just looked terrible during the housing crash.

Housing prices generally increase modestly over time. Since the risky lending practices of last cycle are illegal, I am rooting for the homeownership rate to increase in the next few years as the increase would be more sustainable than the spike in the early 2000s.

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