Stocks Fall As North Korean Summit Was Canceled

President Trump Kim Summit Nixed

The North Korean negotiations with America before the summit were more important than the actual summit. Getting the details in order about how the meeting will be secured and what will be discussed are far more important than the actual meeting. This isn’t like a business deal where real negotiations happen behind closed doors on the day of the meeting. The results of the meeting would’ve been known beforehand. It seems like the President realized that Kim might not go or won’t agree to what he wants, so Trump backed out before it was supposed to happen. It would have been a diplomacy disaster if Trump tried to meet with the North Korean leader and Kim didn’t negotiate or show up.

It’s better to cancel now, then wait. The stock market sold off slightly on the news as the S&P 500 was down 0.2%. The market hasn’t done much after its amazing run 2 weeks ago. Overall, this shouldn’t be that big of a deal for stocks unless North Korean acts out in response to this failed meeting. Ultimately, it’s not a surprise to see the proverbial can kicked down the road. With government officials, almost every tough issue is delayed like a basketball team trying to run out the clock. The issue still remains, but the politician’s term is up. Therefore, the situation is the same. The stock market will mostly ignore the situation, but could selloff on negative news. Unfortunately, there’s never absolute peace in the world. Even through this, stocks have bull runs. Recognize that before selling because of these geopolitical events.

Was That A Top In The 10 Year Yield?

I’m conflicted because I think economic growth is expanding, but I recognize the historic place the 10 year bond yield was at recently. When it hit its peak, the yield was the highest out of other major economies’ 10 year yields for the first time since June 2000. Such a feat isn’t just sentimental. It encourages international bond investors to buy the U.S. 10 year bond. From May 17th, the 10 year yield has fallen from 3.11% to 2.98%. In the same period, the 2 year yield is down 6 basis points, so there has been a flattening. I definitely think the 2 year yield will go higher by the end of the year because of rate hikes, so if the 10 year yield is moving lower or stagnant, the curve will invert shortly. On the topic of a curve inversion, in the Minutes the Fed stated it did care about a possible inversion as the indicator has a strong track record of predicting recessions.

The Dollar Rally Could Be Done

The dollar was down marginally on Thursday. Although, I’m still bullish on the prospect of accelerated U.S. GDP growth, that doesn’t mean the 10 year yield and the U.S. dollar will rally forever. There is a chance that if GDP growth ends up coming in at 3%, those trends will reverse. 3% would still be great growth, but it would be below what they have priced in.

The chart below shows the dollar index compared to the 4 factor average created by Morgan Stanley which has a 14 week lead time. The 4 factor average includes metrics such as yield curves, commodity prices, monetary policy of the People’s Bank of China, and the dispersion of economic data. As you can see, the 4 factor average did a great job in predicting the latest rally in the dollar. This gives you a 14 week lead, so even though it went up a couple weeks afterwards, it still provided the indicator necessary to capture the move. As you can see, the indicator has it a plateau recently which implies the dollar will stabilize where it’s at now.

Specific Changes To Dodd-Frank

President Trump signed into law the Dodd-Frank reform bill that I’ve been discussing for the past few weeks. Even though I think it makes sense to allow community banks to have less stringent standards because they can’t afford to hire the legal team necessary to understand the rules and because the stringent aspects cut into profitability, I think that it’s a sign we’re at in the end of the business cycle. I have always thought the bill’s regulations were too reactionary, meaning they went overboard because people were angry about the mortgage crisis. The fact that cooler heads are now prevailing shows me that we are very late in the business cycle. Right after recessions, new regulations come into place. Right before recessions, regulations get removed.

Let’s quickly review some of the parts of the bill I missed in my previous discussion. For mortgages, the restriction which doesn’t allow borrowers with above a 43% debt to income ratio to get a qualified mortgage has been eliminated for banks with less than $10 billion in assets. This means people who have a down payment and a good credit score, but make less income than necessary, will be able to go to small banks to get a mortgage. It also could work for someone who has a high car payment or student loans.

With student loans, borrowers who entered rehabilitation for a private defaulted student loan can ask for it to be removed from their credit report. On credit reports, people can ask for their credit report to be frozen without paying a fee. This change was made because of the recent Equifax hack which caused 148 million customers’ personal information to be compromised.

Conclusion

I’m going to be watching the dollar and the 10 year bond yield closely. It gives us a key as to what the market thinks of the U.S. economy. I haven’t seen much data which verifies their potential skepticism of U.S. growth. It’s possible the 10 year yield is only correcting a trend which will remain in place. It’s also possible it was over extended and the current price accurately reflects an economy growing at a 3% clip.

 

 

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