The search is on

The search is on.  Stocks ended flat in yesterday’s session as investors searched for news to trade on.  Stocks gave up early gains on concerns over the pending trade deal.

MY TWO CENTS

1.  A big production.  Economists try to simplify everything in order to get down to the core drivers behind something as simple as a transaction or something as complex as a national economy.  We are known for things like “a two-good world” where consumers can only chose to buy either “guns or butter”.  We are also known for figuring out that too much of a good thing is not always good, AKA The Law of Eventually Diminishing Marginal Utility.All of these things which seem to be completely unrelated do actually build into models that give a fairly accurate accounting of an economy.  I am going to take some liberty here and simplify in order to explain something.  In economist geek-talk, this is referred to as abstraction.  Gross Domestic Product (GDP) is an accounting of all goods and services created in a given country.  Imagine an accounting of all of the raw materials pulled from the earth as they are hewn and refined into gadgets which are further combined into products to be sold in the market.  Given that there is only so much raw material available, GDP can only theoretically reach that limit.  So GDP grows as new raw materials are discovered and harvested.   The US has the largest GDP in the world and we have been tapping into raw materials quite effectively for some time.  How then is GDP able to continue growing and growing, given that resources are limited and in some cases, scarce?  The answer is: productivity. Being able to harvest resources more effectively allows an economy to grow quicker.  Think about how much more productive an accountant could be using a computer versus a mechanical adding machine.  Another example of this is development of fracking technology which enabled the tapping into shale oil deposits that could not previously be extracted efficiently.  So for the better part of the last forty years, technology has driven economic growth through increased worker productivity.  Get the picture by now?  Productivity is a key driver of economic growth.  The lecture is over… getting back to reality, the Bureau of Labor Statistics tracks worker productivity and released its Non-Farm Productivity number yesterday.  As you might guess it is not a number that makes too many headlines but it is closely watched by economists.  The number came in down -0.3% compared to last quarter's growth of +2.5%.  The surprise drop is the first negative quarter since 2015 and while it won't set off any loud alarms it is certainly another sign that the economy is slowing.

2. Trading the elections.  Thankfully, Wall Street has largely ignored the recent political shenanigans going on in Washington DC.  There are, after all, plenty of other things to focus on such as the trade war, Federal Reserve Policy, and the global economic slowdown, to name a few.  This past Tuesday, was an election day which didn’t really draw too much financial press because it was an off-year election.  The big oneis  obviously going to be next November with a Presidential election and perhaps, even more importantly, congressional elections.  The outcome of next year’s races can and will impact Wall Street.  The makeup of the House and Senate will determine tax policy, healthcare policy, trade policy, environmental regulatory policy, etc.  All of these will affect different sectors.  Fewer regulations will enable some sectors to grow profits while more regulation may in some cases diminish profits and in others provide new opportunities for profit.  Changes in tax policy can affect consumer spending as well as investment decisions.  Why am I bringing this up now?  Because in a little less than 12 months from now all of these will have an impact on Wall Street, so now is the time to start paying attention.  As we get further into election season we can expect clearer policy pictures emerge from both sides as candidates refine their pitches.  While the picture is certainly unclear at this moment, we can expect that to change rather quickly in the months, if not weeks ahead.

THE MARKETS

Stocks gave up early gains yesterday when reports surfaced that the Phase One trade deal wouldn’t be signed until December.  Interestingly, the market reaction was not extreme hinting that investors are still confident that something good will come of the negotiation.  WHILE YOU SLEPT China announced that it agreed with the US to roll back tariffs on each other’s goods in phases as both sides work toward a trade deal.  The announcement caused stock futures to jump overnight.  Yesterday, the S&P500 climbed by +0.07%, the Dow Jones Industrial Average slipped by -0.0003% (that is a very small number), the Russell 2000 fell by -0.63%, and the NASDAQ Composite Index traded off by -0.29%.  Bonds advanced slightly and. 10-year treasury yields fell by -3 basis points to 1.82%.  Crude oil fell by -1.54% after an EIA report showed a surprise increase in supply.  Futures in crude were up overnight in response to the positive trade headlines.

WHAT’S NXT

- Dallas Fed President Robert Kaplan and Atlanta Fed President Raphael Bostic will speak today.

- This morning Dish, Johnson Controls, Cardinal Health, and Noble Energy beat while Norwegian Cruises, Air Products, and AMC Entertainment missed.  After the bell earnings include Activision Blizzard, GoPro, Zillow, Disney, Revolve Group, Take Two Interactive, and Monster Beverage.

- Pay attention to trade news today as the US has not yet confirmed the tariff rollback that goosed the markets overnight.

daily chartbook 2019-11-07