All posts in "Market Update"

Mnuchin to Congress: Cut taxes or market will dive

“There’s no question in my mind if we don’t get it done you’re going to see a reversal of a significant amount of these gains,” Mnuchin told Politico on Wednesday.

Mnuchin’s warning — a highly unusual one for a sitting treasury secretary — suggests he fears a drop of at least thousands of Dow points. The average has spiked almost 5,000 points since last fall’s election, a rally that President Trump often celebrates as evidence of his success.

Trump’s treasury secretary told Politico that the stock market has “baked into it reasonably high expectations of us getting tax cuts and tax reform done.” He predicted the market will go “up higher” if Congress succeeds on taxes.

It’s true that Trump’s economic agenda, including promises for “massive” tax cuts and deep deregulation, sent the stock market soaring in the weeks and months after the election.

But the market’s entire post-election rally is not based solelyon the anticipation of tax cuts or tax reform. Stocks have been supported by strong corporate profits, improved economic growth and extremely low interest rates.

If all markets cared about were tax cuts, then stocks should have plunged this spring and summer when Trump’s political stumbles threatened his agenda. Instead, investors dialed back their bets on tax cuts by selling “high tax” stocks that should benefit from tax reform. And the broader market kept going higher.

Lately, hopes of tax reform have returned, lifting potential tax cut winners like high-tax payers and small-cap stocks.

dow trump election stocks 1017

Sam Stovall, chief investment strategist at CFRA Research, said tax cut hopes have “boosted investor confidence,” but they didn’t alter the fundamentals that markets trade on: earnings estimates. Those projections haven’t budged because details on the tax deal aren’t available yet, Stovall said.

Only 32% of investors polled by E*Trade believe “President Trump and the current administration” is a leading factor behind the extended bull market in stocks. The survey respondents said that the top three drivers for stocks are: improving U.S. economy (61%), strong earnings (45%) and strong performance in certain sectors (40%).

Those positives are why Stovall isn’t worried about Congress setting off a market crash.

“Should tax cuts not materialize, a pullback or mild correction may ensue, but I don’t think it would trigger a new bear,” Stovall said.

Mnuchin’s comments raised eyebrows because normally the U.S. treasury secretary is counted on to instill financial and economic confidence, not sow doubt.

“That is fundamentally irresponsible. He has no understanding of the role of treasury secretary,” said Robert Shapiro, who served as a Commerce Department economic official under President Clinton and later advised Hillary Clinton.

“Part of the job of the treasury secretary is to maintain the stability of U.S. markets. Every other treasury secretary has recognized this. Apparently, it’s eluded Mr. Mnuchin,” said Shapiro, who is a senior fellow at Georgetown’s McDonough School of Business.

One parallel in recent history of a treasury secretary linking the health of the market to a single piece of legislation is Hank Paulson’s support for the TARP bailout in 2008. The former treasury secretary famously begged Speaker of the House Nancy Pelosi not to blow up the Wall Street rescue. The Dow plunged 777 points after the House of Representatives initially rejected the bailout.

Of course, that was a totally different time as the U.S. was grappling with the scariest financial crisis since the Great Depression. Now, big banks are healthy, unemployment is very low and markets are on the upswing — raising the question of how much the economy really needs tax cuts right now.

Besides, just because the notoriously-fickle market expects something, doesn’t mean it’s the best policy for the moment.

“To pinpoint or lever policy initiatives to the direction the stock market will take seems a little short-term oriented,” said Mark Luchini, chief market strategist at Janney Capital.

Ironically, Luchini said it’s possible the economic expansion is extended if there is no tax deal because it would keep the Federal Reserve from fearing the economy is overheating.


Published at Wed, 18 Oct 2017 16:03:42 +0000

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Wall St. ends up after economic data; S&P up for a fifth week


Wall St. ends up after economic data; S&P up for a fifth week

NEW YORK (Reuters) – U.S. stocks rose on Friday following upbeat economic data and gains in technology shares, pushing the Dow and the S&P 500 to a fifth straight week of gains.

Data showed U.S. retail sales jumped in September, and the University of Michigan’s consumer sentiment index hit its highest since January 2004.

Another report showed consumer prices recorded their biggest increase in eight months as hurricanes Harvey and Irma boosted demand but underlying inflation remained muted.

Netflix (NFLX.O) shares closed 1.9 percent higher after hitting an intraday record high at $200.82 on a slew of price target increases ahead of its earnings report on Monday.

Apple (AAPL.O), up 0.6 percent, gave the S&P 500 its biggest boost, while the S&P technology index .SPLRCT was up 0.5 percent. Shares of big banks were mixed following reports from Bank of America and Wells Fargo.

“We’re seeing a continuation of the strength in the market combined with low volatility. There seems to be money searching for stocks and looking for investments, simply because the momentum is still positive,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

“Also we’re entering a seasonal period where it’s difficult to fight the tape. So I imagine there’s cash coming in off the sidelines.”

The CBOE volatility index .VIX remains at historically depressed levels, closing at 9.61 on Friday.

The Dow Jones Industrial Average .DJI rose 30.71 points, or 0.13 percent, to end at 22,871.72, and the S&P 500 .SPX gained 2.24 points, or 0.09 percent, to 2,553.17.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 3, 2017. REUTERS/Brendan McDermid

The Nasdaq Composite .IXIC added 14.29 points, or 0.22 percent, to 6,605.80, a record closing high.

For the week, the Dow was up 0.4 percent and the S&P 500 was up 0.2 percent. The Nasdaq rose 0.2 percent for the week, registering a third week of gains.

Bank of America (BAC.N), the second-biggest U.S. bank by assets, rose 1.5 percent after the lender’s profit topped estimates due to higher interest rates and a drop in costs.

But Wells Fargo (WFC.N) tumbled 2.8 percent after it reported lower-than-expected revenue for the fourth straight quarter due to a decline in mortgage banking revenue.

The reports from the Wall Street banks kicked off the third-quarter earnings season, with investors hoping profit growth will help justify valuations after a rally that has sent the S&P 500 up about 14 percent so far this year.

Also limiting the day’s gains, the healthcare sector .SPXHC was down 0.3 percent as health insurers and hospital operators tumbled on news that President Donald Trump scrapped billions of dollars in Obamacare subsidies to private insurers for low-income Americans.

Centene (CNC.N) sank 3.3 percent, Molina Healthcare (MOH.N) dropped 3.4 percent and Anthem (ANTM.N) fell 3.1 percent.

Tenet Healthcare (THC.N) dropped 5.1 percent and Community Health System (CYH.N) declined 4 percent.

Advancing issues outnumbered declining ones on the NYSE by a 1.43-to-1 ratio; on Nasdaq, a 1.08-to-1 ratio favored decliners.

About 5.8 billion shares changed hands on U.S. exchanges. That compares with the 6.1 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Reporting by Caroline Valetkevitch in New York; Editing by James Dalgleish


Published at Fri, 13 Oct 2017 22:16:15 +0000

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Weekly Initial Unemployment Claims decrease to 243,000


Weekly Initial Unemployment Claims decrease to 243,000

by Bill McBride on 10/12/2017 08:34:00 AM

The DOL reported:

In the week ending October 7, the advance figure for seasonally adjusted initial claims was 243,000, a decrease of 15,000 from the previous week’s revised level. The previous week’s level was revised down by 2,000 from 260,000 to 258,000. The 4-week moving average was 257,500, a decrease of 9,500 from the previous week’s revised average. The previous week’s average was revised down by 1,250 from 268,250 to 267,000.

Hurricanes Harvey, Irma, and Maria impacted this week’s claims.
emphasis added

The previous week was revised down.

The following graph shows the 4-week moving average of weekly claims since 1971.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 257,500.

This was below the consensus forecast.  The recent increase in claims is due to the hurricanes.


Published at Thu, 12 Oct 2017 12:34:00 +0000

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Bull market is 103 months old. Trump owns 11 of them


Is it too late to buy stocks?
Is it too late to buy stocks?

President Trump’s victory last November set off a massive party on Wall Street that is still going strong today.

The Dow has spiked an incredible 4,500 points since the election. As CNNMoney has reported frequently, that 25% surge is based in part on Trump’s promises to slash taxes and regulation.

Trump, who warned of a “big, fat, ugly bubble” before he took office, brags about the red-hot market now that he’s in charge. He did it again on Wednesday, cheering the “virtually unprecedented Stock Market growth since the election.”

The market’s cheerleader-in-chief never mentions that he inherited a bull market — one that began long before “Make America Great Again” hats started showing up on the campaign trail.

The bull market in stocks started in March 2009, near the end of the Great Recession. This market upswing is now 103 months old, making it the second-longest on record.

Trump can claim credit for 11 months at most, if you start counting after the election. The other 92 months of upward trajectory took place under President Obama.

bull market sp 500 1011

Taken as a whole, the Obama-Trump bull market is historic as well. The S&P 500 has soared 277% since bottoming in March 2009 thanks to the improving economy andextremely-low interest rates. That’s good for No. 2 among all bull markets, according to Bespoke Investment Group.

Of course, the vast majority of those gains occurred under Obama. The stock market more than tripled during Obama’s eight years in office as the U.S. economy recovered from the recession.

Nonetheless, Trump often points to record highs on Wall Street as a barometer of his success. “Stock Market hit an ALL-TIME high!” Trump tweeted on October 5.

He’s right that the Dow has never been higher. In fact, the Dow has notched 65 records since Trump’s election. The S&P 500 isn’t far behind with 52 records. Both have benefited from Trump’s promises of tax cuts as well as strength in corporate profits and the domestic and global economies.

dow trump election stocks 1011

No matter the cause, record highs were a regular occurrence during Obama’s second term — even as Trump was bashing the economic track record of the 44th U.S. president. In fact, the S&P 500 hit 127 all-time highs under Obama, according to Ryan Detrick of LPL Financial.

All-time highs were even more frequent during the economic booms of the 1980s and 1990s. The S&P 500 hit record highs 268 times under President Clinton and 154 times under President Reagan, according to LPL. (Trump has easily surpassed the nine S&P 500 records under President George W. Bush.)

None of those presidents talked up the day-to-day movements of the stock market like Trump has. That’s not just because Twitter didn’t exist during most of those presidencies.

The risk is that taking too much credit for the notoriously-fickle stock market will make it more difficult to avoid criticism when stocks eventually retreat.


Published at Wed, 11 Oct 2017 20:20:46 +0000

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S&P 500 breaks record run on jobs data, drug chain drop


S&P 500 breaks record run on jobs data, drug chain drop

NEW YORK (Reuters) – The S&P 500 eased on Friday, ending a six-day run of record highs as the first monthly decline in U.S. nonfarm jobs in seven years dampened sentiment and pharmacy shares fell on Amazon competition fears.

The Nasdaq ended up for a ninth straight day, however, and set its sixth straight record high close, its longest such streak since seven records in February.

Walgreens Boots Alliance (WBA.O) and CVS Health (CVS.N) fell and were among the biggest drags on the S&P 500 after a CNBC report that Amazon (AMZN.O) was close to a decision on selling prescription drugs. Walgreens shares dropped 4.9 percent and CVS was down 4.9 percent, while Amazon shares rose 0.9 percent.

The Labor Department’s closely watched jobs report showed nonfarm payrolls fell by 33,000 in September as hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring. A bright spot was a better-than-expected rise in average wages.

“It’s been amazing how resilient our U.S. stock market has been, going up on no news or bad news, so there’s no surprise on a day where most people feel it was a mixed jobs report at best that the market actually is reacting in a way that makes sense,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma.

“It’s a logical move for this illogical stock market.”

The Dow Jones Industrial Average .DJI fell 1.72 points, or 0.01 percent, to end at 22,773.67, the S&P 500 .SPX lost 2.74 points, or 0.11 percent, to 2,549.33 and the Nasdaq Composite .IXIC added 4.82 points, or 0.07 percent, to 6,590.18.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 3, 2017. REUTERS/Brendan McDermid

The benchmark’s slight decline follow a six-day run of record closing highs, its longest since 1997.

The CBOE Volatility index .VIX, Wall Street’s fear gauge, bounced sharply after setting a record low close in the previous session.

For the week, the S&P 500 rose 1.2 percent, the Dow added 1.6 percent and the Nasdaq gained 1.5 percent.

Adding to the day’s worries was a report that North Korea is preparing to test a long-range missile.

S&P energy index .SPNY declined 0.8 percent as oil prices CLc1 LCOc1 fell amid a bout of profit taking and the return of oversupply worries.

Shares of Costco (COST.O) dropped 6 percent after the warehouse club retailer reported a fall in gross margins. The stock was the biggest drag on the S&P 500 and the Nasdaq.

Declining issues outnumbered advancing ones on the NYSE by a 1.74-to-1 ratio; on Nasdaq, a 1.11-to-1 ratio favored decliners.

About 5.7 billion shares changed hands on U.S. exchanges. That compares with the 6.2 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Additional reporting by Yashaswini Swamynathan and Gayathree Ganesan in Bengaluru; Editing by Nick Zieminski and James Dalgleish


Published at Fri, 06 Oct 2017 21:25:57 +0000

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Fed must hike rates in face of hot U.S. labor market: Rosengren


Fed must hike rates in face of hot U.S. labor market: Rosengren

MONTREAL (Reuters) – The Federal Reserve must respond to “very tight” U.S. labor markets by gradually raising interest rates or risk halting the economic recovery, a hawkish Fed official said on Saturday.

In prepared remarks that largely restated his views, Boston Fed President Eric Rosengren said he expects the labor market to improve further after U.S. unemployment dropped to 4.2 percent last month, its lowest level since 2001.

“Prudent risk management would argue for the continued gradual removal of monetary policy accommodation in order to minimize the risk of outcomes that might prematurely shorten the current economic recovery,” said Rosengren, who was speaking at the International Atlantic Economic Conference in Montreal, adding he expects the U.S. economy will likely continue to grow above its potential.

“Failing to respond to very tight labor markets with rates remaining negative in real terms could potentially risk unnecessarily shortening the economic recovery,” added Rosengren, who does not vote on policy this year but whose views often portend overall Fed policy.

The Fed has raised rates three times in less than a year and is expected to hike again in December. Below-target inflation has caused some more dovish Fed policymakers to want to wait.

Reporting by Nelson Wyatt in Montreal; Writing by Jonathan Spicer in New York; editing by Diane Craft


Published at Sat, 07 Oct 2017 15:54:36 +0000

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Schedule for Week of Oct 8, 2017


Schedule for Week of Oct 8, 2017

by Bill McBride on 10/07/2017 08:09:00 AM

The key economic reports this week are September retail sales and the Consumer Price Index (CPI).

—– Monday, Oct 9th —–

Columbus Day Holiday: Banks will be closed in observance of Columbus Day. The stock market will be open. No economic releases are scheduled.

—– Tuesday, Oct 10th —–

6:00 AM ET: NFIB Small Business Optimism Index for September.

—– Wednesday, Oct 11th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

Job Openings and Labor Turnover Survey10:00 AM: Job Openings and Labor Turnover Survey for August from the BLS.

This graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings increased in July to 6.170 million from 6.116 in June.  This was the highest number of job openings since this series started in December 2000.

The number of job openings (yellow) were up 3% year-over-year, and Quits were up 4% year-over-year.

2:00 PM: FOMC Minutes, Meeting of September 19 – 20, 2017

—– Thursday, Oct 12th —–

8:30 AM ET: The initial weekly unemployment claims report will be released. The consensus is for 252 thousand initial claims, down from 260 thousand the previous week.

8:30 AM: The Producer Price Index for September from the BLS. The consensus is a 0.4% increase in PPI, and a 0.2% increase in core PPI.

—– Friday, Oct 13th —–

8:30 AM: The Consumer Price Index for September from the BLS. The consensus is for a 0.6% increase in CPI, and a 0.2% increase in core CPI.

Retail Sales8:30 AM ET: Retail sales for September be released.  The consensus is for a 1.9% increase in retail sales.

This graph shows retail sales since 1992 through August 2017.

10:00 AM: Manufacturing and Trade: Inventories and Sales (business inventories) report for August.  The consensus is for a 0.6% increase in inventories.

10:00 AM: University of Michigan’s Consumer sentiment index (preliminary for October). The consensus is for a reading of 95.5, up from 95.1 in September.

—– Sunday, Oct 15th —–

At 9:00 AM ET, Speech by Fed Chair Janet YellenThe Economy and Monetary Policy, At the 32nd Annual G30 International Banking Seminar, Washington, D.C


Published at Sat, 07 Oct 2017 12:09:00 +0000

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September Employment Report: 33,000 Jobs Lost, 4.2% Unemployment Rate


September Employment Report: 33,000 Jobs Lost, 4.2% Unemployment Rate

by Bill McBride on 10/06/2017 08:46:00 AM


From the BLS:

The unemployment rate declined to 4.2 percent in September, and total nonfarm payroll employment changed little (-33,000), the U.S. Bureau of Labor Statistics reported today. A sharp employment decline in food services and drinking places and below-trend growth in some other industries likely reflected the impact of Hurricanes Irma and Harvey.

Hurricane Irma made landfall in Florida on September 10–during the reference period for both the establishment and household surveys–causing severe damage in Florida and other parts of the Southeast. Hurricane Harvey made landfall in Texas on August 25–prior to the September reference periods–resulting in severe damage in Texas and other areas of the Gulf Coast.

Our analysis suggests that the net effect of these hurricanes was to reduce the estimate of total nonfarm payroll employment for September. There was no discernible effect on thenational unemployment rate.

The change in total nonfarm payroll employment for July was revised down from +189,000 to +138,000, and the change for August was revised up from +156,000 to +169,000. With these revisions, employment gains in July and August combined were 38,000 less than previously reported.

In September, average hourly earnings for all employees on private nonfarm payrolls rose by 12 cents to $26.55. Over the past 12 months, average hourly earnings have increased by 74 cents, or 2.9 percent.
emphasis added

Payroll jobs added per monthClick on graph for larger image.

The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed – mostly in 2010 – to show the underlying payroll changes).

Total payrolls decreased by 33 thousand in September (private payrolls decreased 40 thousand).

Payrolls for July and August were revised down by a combined 38 thousand.


Year-over-year change employmentThis graph shows the year-over-year change in total non-farm employment since 1968.

In September the year-over-year change was 1.78 million jobs.  This is the smallest year-over-year gain since 2012.

The third graph shows the employment population ratio and the participation rate.


Employment Pop Ratio, participation and unemployment ratesThe Labor Force Participation Rate was increased in September at 63.1%. This is the percentage of the working age population in the labor force.   A large portion of the recent decline in the participation rate is due to demographics.

The Employment-Population ratio decreased to 60.4% (black line).

I’ll post the 25 to 54 age group employment-population ratio graph later.


unemployment rateThe fourth graph shows the unemployment rate.

The unemployment rate decreased in September to 4.2%.

This was below expectations of 95,000 jobs, and the previous two months combined were revised down. The headline jobs number was weak – mostly due to the impact of the hurricanes – but wages picked up and the unemployment rate declined further.



Published at Fri, 06 Oct 2017 12:46:00 +0000

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Hurricanes Harvey, Irma sink U.S. payrolls in September


Hurricanes Harvey, Irma sink U.S. payrolls in September

WASHINGTON (Reuters) – U.S. employment fell in September for the first time in seven years as Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring, the latest indication that the storms undercut economic activity in the third quarter.

The Labor Department said on Friday nonfarm payrolls decreased by 33,000 jobs last month amid a record drop in employment in the leisure and hospitality sector.

The decline in payrolls was the first since September 2010. The Department said its analysis suggested that the net effect of Harvey and Irma, which wreaked havoc in Texas and Florida in late August and early September, was to “reduce the estimate of total nonfarm payroll employment for September.”

“While nonfarm payrolls declined last month, investors will find solace in a whole host of other labor market indicators that reveal an underlying labor market that continues to show evidence of resilience and continued tightening,” said Scott Anderson, chief U.S. economist at Bank of the West in San Francisco.

Economists had forecast payrolls increasing by 90,000 jobs last month. Payrolls are calculated from a survey of employers, which treats any worker who was not paid for any part of the pay period that includes the 12th of the month as unemployed.

Many of the dislocated people will probably return to work. That, together with rebuilding and clean-up is expected to boost job growth in the coming months. Leisure and hospitality payrolls dived 111,000, the most since records started in 1939, after being unchanged in August.

There were also decreases in retail and manufacturing employment last month. Stripping out the effects of the hurricanes, the labor market remains strong. The government revised data for August to show 169,000 jobs created that month instead of the previously reported 156,000.

Harvey and Irma did not have an impact on the unemployment rate, which fell two-tenths of a percentage point to 4.2 percent, the lowest since February 2001. The smaller survey of households from which the jobless rate is derived treats a person as employed regardless of whether they missed work during the reference week and were unpaid as result.

The decrease in the unemployment rate reflected a 906,000 surge in household employment, which offset a 575,000 increase in the labor force.

The dollar was trading higher against a basket of currencies after the data, while prices for U.S. Treasuries fell. Stocks on Wall Street fell marginally.


A man walks through floods waters and onto the main road after surveying his property which was hit by Hurricane Harvey in Rockport, Texas, U.S. August 26, 2017. REUTERS/Adrees Latif

Underscoring the disruptive impact of the hurricanes, the household survey showed 1.5 million people stayed at home in September because of the bad weather, the most since January 1996. About 2.9 million people worked part-time, the largest number since February 2014.

The length of the average workweek was unchanged at 34.4 hours. With the hurricane-driven temporary unemployment concentrated in low-paying industries like retail and leisure and hospitality, average hourly earnings increased 12 cents or 0.5 percent in September after rising 0.2 percent in August.

That pushed the annual increase in wages to 2.9 percent, the largest gain since December 2016, from 2.7 percent in August.

The mixed employment report should not change views the Federal Reserve will raise interest rates in December. Fed Chair Janet Yellen cautioned last month that the hurricanes could “substantially” weigh on September job growth, but expected the effects would “unwind relatively quickly.”

“The Fed has been hyper-focused on wage growth, so the above-average increase will be a welcome relief, even if there is some storm impact embedded in the number,” said Marvin Loh, senior global markets strategist at BNY Mellon in Boston. “We think that the report strengthens the Fed’s December hike hand.”

The U.S. central bank said last month it expected “labor market conditions will strengthen somewhat further.” The Fed left interest rates unchanged in September, but signaled it expected one more hike by the end of the year. It has increased borrowing costs twice this year.

Annual wage growth of at least 3.0 percent is need to raise inflation to the Fed’s 2 percent target, analysts say.

The employment report added to August consumer spending, industrial production, homebuilding and home sales data in suggesting that the hurricanes will dent economic growth in the third quarter.

Economists estimate that the back-to-back storms, including Hurricane Maria which destroyed infrastructure in Puerto Rico last month, could shave at least six-tenths of a percentage point from third-quarter gross domestic product.

Growth estimates for the July-September period are as low as a 1.8 percent annualized rate. The economy grew at a 3.1 percent rate in the second quarter.

Private payrolls fell by 40,000 jobs, the biggest drop since February 2010. Manufacturing employment slipped by 1,000 jobs pulled down by declines at motor vehicle assembly and chemical plants as well as textile mills.

Retail employment fell by 2,900 jobs as food stores payrolls tumbled 6,900. There were also declines in employment at department stores. Construction payrolls rose 8,000 in September as a 3,900 drop in jobs at homebuilding sites was offset by increases elsewhere.

Reporting by Lucia Mutikani; Editing by Andrea Ricci


Published at Fri, 06 Oct 2017 14:53:08 +0000

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Dollar surges as Fed talk boosts Treasury yields


Dollar surges as Fed talk boosts Treasury yields

LONDON (Reuters) – The dollar soared on Monday as U.S. Treasury yields hit their highest level since mid-July, while Spanish borrowing costs rose and stocks fell as a violent police crackdown on an independence vote in Catalonia rattled investors.

Other European bourses rose and Wall Street looked set to open up 0.2 percent, according to index futures.

Firming expectations the U.S. Federal Reserve will raise interest rates for a third time this year and talk of a potentially more hawkish successor to Fed Chair Janet Yellen combined to push Treasury yields higher.

Ten-year yields topped 2.37 percent, up 4 basis points on the day, pushing the dollar half a percent higher against a basket of currencies.

“The dollar is stronger on higher Treasuries, and the market is seeming to play the idea that the Fed might become more hawkish when we look at the possible candidates for the board of directors,” said Antje Praefcke, FX strategist at Commerzbank.

Treasury yields later pulled back – the 10-year yield last stood at 2.34 percent, up just 1.3 basis points on the day, but the dollar index retained most of its gains.

The euro fell 0.7 percent to $1.1733, though traders said the Catalan referendum had only a limited impact on the single currency.

But in Spain, the IBEX stocks index fell 1.4 percent, underperforming the pan-European STOXX 600 index, which rose 0.3 percent.

The two biggest fallers on the IBEX index were Catalonia-based Banco de Sabadell and Caixabank, down 5.3 and 4.1 percent respectively.

Spanish 10-year government bond yields rose more than 7 basis points to 1.69 percent, taking the gap between them and German benchmarks to its widest in nearly four months.

The cost of insuring Spanish debt, as measured by five-year credit default swaps, rose to its highest in a month.

Catalan officials said 90 percent of voters in Sunday’s ballot favored secession, raising the possibility of a unilateral declaration of independence in the wealthy region.

“This issue is likely to complicate policy-making at a national level as opposition parties seek to gain political capital from what is arguably a gross PR error on the part of PM Rajoy’s government,” said Richard McGuire, head of rates strategy at Rabobank in London.

A general view shows the trading floor at the stock exchange in Frankfurt, Germany October 2, 2017. Zoomed image is taken on slow shutter speed. REUTERS/Kai Pfaffenbach

However, mainstream parties largely back premier Mariano Rajoy’s opposition to Catalan independence, even though he faces criticism over his handling of the issue.

Asian shares rose after upbeat economic data from China and Japan. MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.2 percent.

Japan’s Nikkei closed up 0.2 percent after a survey showed the mood among big manufacturers was its best in a decade.

China’s manufacturing activity grew at its fastest pace since 2012 last month. The official Purchasing Managers’ Index released on Saturday rose to 52.4 from 51.7 in August.

Chinese markets were closed for a week-long holiday.

The Japanese yen fell half a percent to 113.02 per dollar while sterling fell 0.6 percent to $1.3325.

The dollar has been on a roll since Fed chief Yellen said last week it would be “imprudent” to keep monetary policy on hold until U.S. inflation picked up to 2 percent.


Speculation President Donald Trump might choose former Fed Governor Kevin Warsh, who is considered more hawkish than Yellen, to replace her as head of the central bank also boosted the dollar.

The dollar notched up its best weekly performance of 2017 last week, lifted also by a revival of the “Trumpflation” trade on expectations Trump would deliver a stalled tax reform plan.

Oil prices fell after a Reuters survey found output from the Organization of the Petroleum Exporting Countries (OPEC) rose by 50,000 barrels a day last month.

Brent crude, the international benchmark, fell 91 cents a barrel to $55.88.

The strong dollar helped drag gold down to its lowest in almost seven weeks. The precious metal fell to as low as $1,270 an ounce before edging back up to $1,274, down 0.4 percent on the day.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Additional reporting by Wayne Cole in Sydney, Jemima Kelly, John Geddie and Claire Milhench in London; Editing by Matthew Mpoke Bigg

Our Standards:The Thomson Reuters Trust Principles.


Published at Mon, 02 Oct 2017 11:57:31 +0000

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Dow notches longest quarterly win streak in 20 years


Trump's shifting views on stock market highs
Trump’s shifting views on stock market highs

Dow notches longest quarterly win streak in 20 years


The stock market, undaunted by monster hurricanes, political tension and North Korea threats, keeps climbing to new heights.

The Dow soared another 5% during the third quarter, which ends for Wall Street on Friday.

The strong gains extend the Dow’s streak of winning quarters to eight. It’s the longest since an 11-quarter boom that ended in September 1997, according to FactSet stats. Back then, the U.S. economy was going gangbusters under President Bill Clinton at the start of the dotcom boom.

The current streak began during the final three months of 2015 and accelerated after last fall’s election. For those scoring at home, that’s five winning quarters on President Barack Obama’s watch and three under President Trump, who took office in January.

Trump, who claimed as a candidate that the market was in a “big, fat, ugly bubble,”brags about it now that he’s in charge. He did that again on Friday, cheering the “RECORD HIGH” for the S&P 500.

It’s true that the stock market soared after Trump’s victory. Wall Street cheered his promises to revamp the tax code, slash regulation and ramp up infrastructure spending. (The market largely ignored the administration’s less business-friendly trade and immigration policies.)

Stocks have continued climbing even though none of Trump’s economic policies have gotten through Congress. That’s because economic strength in the United States and overseas has kept corporate profits growing.

“The market is primarily up because earnings have been good. The tax reform proposal has been icing on the cake — but that’s not the ultimate reason,” said JJ Kinahan, chief market strategist at TD Ameritrade.

dow trump election stocks 4000

Wall Street has been largely unfazed by the turbulence of the past few weeks and months. The GOP’s repeated failure to repeal and replace Obamacare didn’t dent the market. Nor did the hurricanes that ravaged the Gulf Coast and Caribbean. And escalating tension between Trump and North Korean leader Kim Jong Un caused just fleeting concern among investors.

If anything, September was a bore for the stock market despite its history as a rocky month. The S&P 500 had its least volatile September going back at least to 1970, according to Ryan Detrick at LPL Financial. That’s based on how much the market moves from its high to its low each day.

The calendar ahead looks favorable for the stock market. Over the past 20 years, the Dow climbed 70% of the time during October, according to Bespoke Investment Group. The final three months of the year have historically been the best for the stock market.

That could change this year if Corporate America lets Wall Street down. Investors are hoping third-quarter results, set to begin streaming in later this month, will continue to show healthy profits.

Wall Street may also have to withstand bickering over the GOP’s plans to overhaul the tax system. Tax reform is complex, and many major questions remain unanswered.

“The bill’s announcement, and its eventual passing, are and will be bullish for stocks. But what comes in between is not bullish, and that starts right now,” Michael Block, chief market strategist at Rhino Trading Partners, wrote in a report.

Eventually, investors may grow impatient with Washington if it looks like the tax overhaul is being further delayed or watered down by politics.

“The markets are not going to ignore politics in 2018,” said TD Ameritrade’s Kinahan. “Washington has to get something done.”


Published at Fri, 29 Sep 2017 16:16:54 +0000

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Russell Breakout Lifts Small Caps Into Leadership


Russell Breakout Lifts Small Caps Into Leadership

By Alan Farley | September 28, 2017 — 12:04 PM EDT

The Russell 2000 index has lifted to a bull market and all-time high this week, signaling the next stage of a powerful small-cap rotation that could continue into year end and beyond. At the same time, this emerging leadership may force funds and institutions to exit overheated tech stocks to free up speculative capital, dropping the Nasdaq 100​ into a long period of relative underperformance.

Look no further than the currency markets to find the reason for this bullish development, with the U.S. Dollar Index (DXI) bouncing off two-year range support following a brutal decline in response to the Trump presidency. Domestic issues, including small caps, tend to strengthen and outperform during periods of U.S. dollar strength because multinational corporations become less profitable due to exchange rate headwinds. (For a refresher, check out: An Introduction to Small-Cap Stocks.)

There are dozens of ways to play this breakout, led by the venerable iShares Russell 2000 ETF (IWM), which currently trades more than 22 million shares per day on average. The Vanguard Small Cap Value ETF (VBR) offers an interesting second choice, holding the second highest asset total among active funds while trading fewer than 300,000 shares per day. Market players seeking higher exposure may consider Direxion Daily Small Cap Bull 3X Shares (TNA) or ProShares UltraPro Russell 2000 ETF (URTY), which offers 2X leverage. (See also: Top 3 Small-Cap ETFs for 2017.)

IWM Long-Term Chart (2000 – 2017)

The iShares Russell 2000 ETF came public in May 2000 in the mid-$40s and rallied quickly to $54.60. That peak marked the highest high for more than three years, ahead of a volatile decline that posted an all-time low at $32.30 in the fourth quarter of 2002. It finally broke out to a new high in 2004, entering a rising channel that contained price action into the 2007 bull market high at $85.20.

The fund plunged during the 2008 economic collapse but held above the 2002 low, ahead of a V-shaped recovery wave that completed a 100% round trip into the 2007 high in April 2011. It spent the next two years grinding out a cup and handle pattern at that level, ahead of a 2013 breakout that generated the most prolific gains so far in this bull market cycle. The rally’s trajectory eased above $120 in March 2014, giving way to a shallow uptrend that topped out at $129 in June 2015. (For more, see: IWM: iShares Russell 2000 Index ETF.)

It then entered a severe correction, losing ground in a multi-wave decline that came to rest at a two-year low in the mid-$90s in February 2016. A recovery wave into September stalled four points below 2015 resistance, generating a pullback into November, followed by a November breakout that stalled in the low $140s just one month later. The fund carved a narrow consolidation at that level for more than nine months and broke out this week.

IWM Short-Term Chart (2015 – 2017)

IWM fell more than 35 points after topping out in June 2017, coming to rest well above new support at the 2013 breakout in the mid-$80s. The subsequent bounce followed 2007 to 2011 fractal behavior, gaining ground at the same pace as the prior decline. However, it spent little or no time testing resistance in this instance, breaking out within one day of reaching the 2015 high. (See also: Small Caps: Rising Rates Not All Bad News.)

The consolidation into September 2017 carved a shallow rising channel that generated a long series of bull traps. This week’s rally finally cleared channel resistance, opening the door to a much stronger price rate of change that could generate upside into $170, or 1,700 on the underlying index. Pullbacks to $142 should be buyable in this scenario, while declines need to hold the 50-day exponential moving average (EMA), currently rising from $140.

The Bottom Line

The Russell 2000 small-cap index has broken out above a nine-month rising channel, confirming last December’s breakout while setting the stage for healthy fourth quarter gains. (For additional reading, check out: A Big Battle Among Small-Cap ETFs.)


Published at Thu, 28 Sep 2017 16:04:00 +0000

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U.S. economy accelerates in second quarter; hurricanes expected to slow growth

U.S. economy accelerates in second quarter; hurricanes expected to slow growth

WASHINGTON (Reuters) – The U.S. economy expanded a bit faster than previously estimated in the second quarter, recording its quickest rate of growth in more than two years, but the momentum likely slowed in the third quarter due to the impact of Hurricanes Harvey and Irma.

Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a rise in inventory investment.

“The destruction caused by Hurricanes Harvey and Irma and the resulting disruption … are expected to be a drag on third-quarter growth,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. “Nonetheless, the economy remains on track.”

Economic growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists estimate that Harvey and Irma, which struck Texas and Florida, could cut as much as six-tenths of a percentage point from GDP growth in the third quarter.

Harvey was blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. Further weakness is anticipated in September because of Irma.

Rebuilding efforts are, however, expected to boost GDP growth in the fourth quarter and in early 2018. Signs of increasing inventory investment by businesses could soften the storms’ punch to the economy.

In a separate report on Thursday, the Commerce Department said wholesale inventories jumped 1.0 percent in August after rising 0.6 percent in July. Inventories at retailers shot up 0.7 percent after being unchanged in July. The department also said the goods trade deficit fell 1.4 percent to $62.9 billion in August.

That leaves an upside risk to growth estimates for the July-September quarter, which are below 2.5 percent.

“The data available so far suggest that the firming in real inventory accumulation between second quarter and third quarter could be significant and could add over a full percentage point to growth in the third quarter,” said Daniel Silver, an economist at JPMorgan in New York.

Harvey and Irma continue to impact the labor market and are expected to cut into job growth this month. In a third report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended Sept. 23.

Still, the labor market remains strong. Claims have now been below the 300,000 threshold, which is associated with a robust labor market, for 134 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.

Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.

Prices for longer-dated U.S. Treasuries were trading lower and the dollar .DXY slipped against a basket of currencies. Stocks on Wall Street were mixed.


With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Even so, economists believe growth this year will fall short of President Donald Trump’s ambitious 3.0 percent target.

Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, including lowering the corporate income tax rate to 20 percent and implementing a new 25 percent tax rate for pass-through businesses such as partnerships to boost the economy.

But the plan gave few details on how the tax cuts, which could cost about $1.5 trillion over a decade, would be paid for without increasing the budget deficit. That sets up what is likely to be a bruising battle in the U.S. Congress.

“The plan’s price tag would also result in an increase in the national debt, which could make it difficult to pass as is. Odds are the proposal will be scaled back,” said Ryan Sweet, senior economist at Moody’s Analytics in Westchester, Pennsylvania.

Growth in consumer spending, which makes up more than two-thirds of the U.S. economy, was unrevised at a 3.3 percent rate in the second quarter as an increase in spending on services was offset by a downward revision to durable goods outlays.

Amid robust consumer spending, businesses accumulated a bit more inventory than previously reported to meet the strong demand. Inventory investment added just over one-tenth of a percentage point to GDP growth in the second quarter. It was previously reported to have been neutral.

Growth in business spending on equipment was unchanged at a rate of 8.8 percent, the fastest pace in nearly two years.

Investment on nonresidential structures was revised to show it increasing at a 7.0 percent pace, up from the previously reported 6.2 percent rate. There were minor revisions to government spending, exports and imports.

Investment in homebuilding was weaker than previously reported, with outlays falling at a 7.3 percent rate rather than at a 6.5 percent pace.

Graphic: here

Reporting by Lucia Mutikani; Editing by Paul Simao

Our Standards:The Thomson Reuters Trust Principles.


Published at Thu, 28 Sep 2017 16:20:11 +0000

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Record inequality: The top 1% controls 38.6% of America’s wealth


Melinda Gates: Tax the rich to pay for services
Melinda Gates: Tax the rich to pay for services

America’s inequality problem is getting worse.

The richest 1% of families controlled a record-high 38.6% of the country’s wealth in 2016, according to a Federal Reserve report published on Wednesday.

That’s nearly twice as much as the bottom 90%, which has seen its slice of the pie continue to shrink.

The bottom 90% of families now hold just 22.8% of the wealth, down from about one-third in 1989 when the Fed started tracking this measure.

The numbers paint a stark picture of the inequality problems gripping the country and the ability of politicians, like President Donald Trump and Sen. Bernie Sanders, to attract voters by arguing that the system is “rigged” in favor of the rich.

Even the Fed acknowledged in the report that the distribution of wealth has “grown increasingly unequal in recent years.”

inequality wealth rich

Not only that, but the richest Americans are taking home an even bigger part of the nation’s overall earnings.

The top 1% of families brought in a record-high 23.8% of the overall income in 2016, the Fed said. That’s up from 20.3% in 2013 and about twice as high as the low point in 1992.

The bottom 90% of families now make less than half of the country’s income. That figure slipped to 49.7% last year, down from more than 60% in 1992.

The good news is that the middle class just enjoyed its biggest two-year raise in decades. Median household income ticked up by 3.2% last year following a 5.2% jump in 2015, according to the Census Bureau.

However, it’s not just a stagnant wages problem. The booming stock market may also be contributing to America’s inequality issues.

On the one hand, the Fed said that the value of stock portfolios rose “dramatically” over the past three years to an average of $344,500.

But millions of Americas can’t feel the stock market boom because they’re not invested or don’t have much money in the market.

Overall, 51.9% of families owned stocks in 2016, up from 48.8% in 2013. Stock ownership is much less popular among less affluent people though.

Barely one-third of families in the bottom 50% of earners own stocks, either directly or indirectly. The average stock portfolio among this group is worth about $52,000. That’s up significantly from 2010, but down from $55,300 in 2013.

By contrast, the Fed said 93.6% of the top income group owned stocks in 2016. Their average holdings stood at $1.4 million last year, up from $999,400 in 2013.

–CNNMoney’s Tami Luhby contributed to this report.


Published at Wed, 27 Sep 2017 20:05:00 +0000

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Wall St. edges up on modest tech rebound

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 2, 2017. REUTERS/Brendan McDermid


Wall St. edges up on modest tech rebound

NEW YORK (Reuters) – U.S. stocks advanced modestly on Tuesday as technology shares bounced from sharp losses in the prior session and comments from Fed Chair Janet Yellen boosted expectations of a December rate hike.

Yellen said the Fed needs to continue gradual rate hikes and it would be imprudent to leave rates on hold until inflation reached the Fed’s 2-percent target.

Earlier in the session, Atlanta Fed Chief Raphael Bostic, a non-voting member this year, said he would want “clear evidence” that prices were firming before committing to another rate increase, but did not rule out another hike in 2017.

Chances of a rate hike in December rose to 78 percent from about 40 percent a month ago, according to CME Group’s FedWatch tool.

“Until either (she) or her cohorts say something that is not expected, the market is going to roll over pretty much everything they say,” said David Schiegoleit, managing director of investments, U.S. Bank Private Wealth Management in Newport Beach, California.

Economic data showed U.S consumer confidence fell in September while home sales dropped to an eight-month low in August due to the impact of Hurricanes Harvey and Irma.

The Dow Jones Industrial Average .DJI rose 11.5 points, or 0.05 percent, to 22,307.59, the S&P 500 .SPX gained 2.69 points, or 0.11 percent, to 2,499.35 and the Nasdaq Composite .IXIC added 20.25 points, or 0.32 percent, to 6,390.84.

Technology .SPLRCT, up 0.56 percent, was the best performing major sector, recovering somewhat from losses in the prior session. Tech shares suffered their worst one-day drop in five weeks on Monday as concerns over tensions with North Korea prompted investors to book profits in what has been the best performing sector this year.

Apple (AAPL.O) rose 2.11 percent after four straight sessions of losses to help prop up the three major indexes, after Raymond James boosted its price target on the iPhone maker to $180 from $170.

“When we woke up today and the lights still came on everybody may have said there are some opportunity in those tech shares. It is simply just a little bit duller, mirror image of what we saw yesterday,” said Schiegoleit.

Marine Corps General Joseph Dunford said the U.S. regards North Korea as the world’s greatest threat but despite an escalation in tensions over its ballistic missile and nuclear program, Pyongyang has not changed its military posture.

Darden Restaurants (DRI.N) slumped 5.60 percent after the Olive Garden parent said it expected the negative effects on sales and earnings from Hurricane Irma to be about double that from Hurricane Harvey.

Red Hat (RHT.N) rose climbed 4.09 percent after the Linux distributor’s quarterly profit came in above estimates and the company raised its full-year forecast.

Advancing issues outnumbered declining ones on the NYSE by a 1.53-to-1 ratio; on Nasdaq, a 1.59-to-1 ratio favored advancers.

Reporting by Chuck Mikolajczak; Editing by Nick Zieminski


Published at Tue, 26 Sep 2017 18:46:54 +0000

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Duy: “Has The Fed Abandoned Its Reaction Function?”


Duy: “Has The Fed Abandoned Its Reaction Function?”

by Bill McBride on 9/25/2017 01:44:00 PM

From economist Tim Duy at FedWatch:

The immediate policy outcomes of the FOMC meeting were largely as expected. Central bankers left interest rates unchanged while announcing that the reduction of the balance sheet will begin in October as earlier outlined in June. The real action was in the Summary of Economic Projections. Policymakers continue to anticipate one more rate hike this year and three next. This policy stance looks inconsistent with the downward revisions to projections of inflation and the neutral rate; under the Fed’s earlier reaction function, the combination of the two would drive down rate projections. Arguably, policy is thus no longer as data dependent as the Fed would like us to believe. That or the reaction function has changed.

The economic forecasts were somewhat confounding. Policymakers edged up their growth forecasts, but still anticipate that unemployment will end the year at 4.3%.

The unemployment forecast for the next two years edged down 0.1 percentage point, but this relative stability is somewhat confusing given that growth is expected to exceed potential growth until 2020 (remember, the Fed believes that labor force participation is more likely to fall than rise, so strong growth should induce downward pressure on unemployment).

Bottom line: the Fed is strongly committed to rate hikes. The[y] don’t appear to be following their earlier reaction function; policy feels path dependent at the moment. Indeed, given the Fed’s expectation of low inflation and volatile and possibly weak data due to the hurricanes, it is difficult to see what stops the Fed from hiking in December.



Published at Mon, 25 Sep 2017 17:44:00 +0000

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German election; More NAFTA and Brexit talks; Tax reform


GOP senators unveil alternative health plan
GOP senators unveil alternative health plan

German election; More NAFTA and Brexit talks; Tax reform


1. Germany’s election: Angela Merkel won a fourth term as German Chancellor. She went against Martin Schulz of the Social Democratic Party in Sunday’s election.

Merkel, 63, has led the European Union’s largest economy for more than 11 years.

Germans voted for seats in the Bundestag, the country’s parliament. Now Merkel will have to put a coalition government together, and her center-right CDU and its sister party, CSU, had their share of the vote slashed. For the first time since 1961, a far-right party won enough votes to enter the Bundestag.

Merkel’s win could mean bad news for German automakers. She’s become a tough critic of the industry, which is still reeling from the Volkswagen emissions scandal.

2. NAFTA talks, Round 3: The renegotiation of NAFTA, the trade deal between the U.S., Canada and Mexico that President Trump promised to blow up, is continuing.

Little if any visible progress has been made so far on key issues, such as car manufacturing. The third round of talks began on Saturday in Ottawa and run through Wednesday.

All sides are signaling that they plan to bring a heavier hand this time.

One highlight: American officials are expected to propose a controversial new “sunset clause” to NAFTA, which means the agreement would expire after five years unless all countries decide to sign on for another five years.

“It would force a systematic reexamination” of NAFTA, Commerce Secretary Wilbur Ross said at an event hosted by Politico on September 14. Critics say it would cause widespread uncertainty in the business community.

3. Brexit talks, Round 4: Britain and the European Union will take another stab at Brexit negotiations on Monday.

Both parties still need to sort out the rights of millions of migrants, trade terms and the size of the divorce bill Britain will pay the EU.

Earlier this month, British Parliament voted in favor of a bill that ensures European laws won’t apply to the United Kingdom once Brexit is completed in 2019.

The vote was a victory for Prime Minister Theresa May, who has been under mounting pressure to unite her government.

4. The week ahead in Washington: It was supposed to be (another) pivotal moment in the Republicans’ attempts to replace Obamacare. That was until Senator John McCain said he wouldn’t support the latest bill, known as Graham-Cassidy.

Tax reform remains on the docket this week. Republicans may release a framework of their plan to cut taxes. How much detail is not clear.

5. Earnings: Nike is set to report quarterly financial results on Tuesday. Nike(NKE) faces stiff competition from Adidas, which last week became the second best seller of American footwear.

The owner of Olive Garden is also reporting earnings on Tuesday. Darden Restaurants(DRI) enjoyed a jump in sales when it reported earnings last quarter. This time around, investors are expecting to see sales of around $1.9 billion.

6. Coming this week:

Monday — Fourth round of Brexit talks; Time and Fortune’s CEO leadership conference

Tuesday — Nike(NKE) and Darden(DRI) earnings

Thursday — Report on U.S. gross domestic product for second quarter

Friday — Twitter(TWTR, Tech30) meets with Senate Intelligence Committee; New data due on Brazil’s struggling economy


Published at Sun, 24 Sep 2017 13:52:49 +0000

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Shorting volatility: Rising risks mean itchier trigger fingers


Shorting volatility: Rising risks mean itchier trigger fingers

NEW YORK (Reuters) – A long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.

U.S. equity market volatility – the daily fluctuations in stock prices – has hovered near record lows for much of this year.

The CBOE Volatility Index .VIX, a gauge of the degree to which investors expect share prices to fluctuate, has averaged 11.4 this year. That is lower than for any comparable period over its nearly three-decade history.

Robust corporate earnings, encouraging economic growth and a view that world central banks are available to rescue markets if trouble strikes, have helped mute stock market gyrations and spell success for those betting on calm.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV.P), which makes money as long as the volatility drops or holds in place, is up about 100 percent this year.

Some traders, however, have grown more wary of increased risks to the trade.

“I think a lot of folks have gotten lulled into a false sense of security because the short trade has gone so well for so long,” said Matt Thompson co-head of Volatility Group at Typhon Capital LLC, in Chicago.

“We are still shorting volatility but we have an itchier trigger finger.”


While there are many ways to short volatility – bet on lower stock gyrations – investors’ hunger for this trade is particularly apparent in the growth in volatility-linked exchange traded products (ETPs).

Assets under management for the top two short volatility products is at $2.8 billion and their exposure to volatility is at an all-time high, according to Barclays Capital.

But the very popularity of the trade has cranked up the risk.

These products hold first and second month volatility futures, buying and selling these contracts daily to keep their volatility exposure in line with the level of stock swings in the market.

Managers of these leveraged and inverse products are required to buy volatility futures as they go up and sell when they decline.

Strategists fear that this rebalancing – which needs be even more pronounced if a shock follows a period of unusually muted volatility, such as now – may be akin to adding fuel to fire.

“There could be a feedback effect and maybe selling begets more selling,” said Salil Aggarwal, equity derivatives strategist at Deutsche Bank in New York.

“Risk/reward considerations would imply cutting positions to more manageable levels,” he said.


Meanwhile, investors are not reaping as much for taking on risk as they did in the past, said Anand Omprakash, director of equity and derivative strategy at BNP Paribas, in New York.

What traders are being paid to take on the short volatility risk currently, is slightly below their average historical take since January 2013, and roughly 6 percent lower than what they were paid monthly in mid-2016, Omprakash estimates.

“You were being paid much better for much of 2016 than for much of 2017,” he said. “I don’t know if I would necessarily say the trade has run out of steam, but I don’t think it offers the kind of risk adjusted return that it offered last year.”

And the stakes are high. Strategists warn that one or two big shocks could wipe away months of profits.

The inverse volatility product XIV, while having doubled in price this year, logged an 11.4 percent decline in August as stock gyrations picked up briefly amid escalating worries about the ability of the administration of President Donald Trump to push through its economic agenda.

“The risk/reward of the trade as a buy and hold proposition is not the same as it was before the U.S. election or in the middle of the oil crisis in 2015 and early 2016,” said Stephen Aniston, president of investment adviser Black Peak Capital, in Connecticut.

Positioning in these products, primarily driven by retail players, may be more skewed to the short side than the broader market where institutional investors hold sway.

“I don’t think the risk is necessarily as big on the institutional side as it is on the retail side,” said Omprakash.

To be sure, not everyone is rushing to bet on a spike in volatility, but experts do warn that investors should tread carefully when shorting volatility from here.

Additional reporting by Terence Gabriel; Editing by Bernadette Baum


Published at Sat, 23 Sep 2017 01:00:07 +0000

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Schedule for Week of Sept 24, 2017

by MashiroMomo from Pixabay

Schedule for Week of Sept 24, 2017

by Bill McBride on 9/23/2017 08:09:00 AM

The key economic report this week is New Home sales for August on Tuesday.

Other key indicators include the third estimate of Q2 GDP, and July Case-Shiller house prices.

—– Monday, Sept 25th —–

8:30 AM ET: Chicago Fed National Activity Index for August. This is a composite index of other data.10:30 AM: Dallas Fed Survey of Manufacturing Activity for September.

—– Tuesday, Sept 26th —–

Case-Shiller House Prices Indices9:00 AM ET: S&P/Case-Shiller House Price Index for July.This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the June 2017 report (the Composite 20 was started in January 2000).

The consensus is for a 5.9% year-over-year increase in the Comp 20 index for July.

Early: Reis Q3 2017 Apartment Survey of rents and vacancy rates.

New Home Sales10:00 AM ET: New Home Sales for August from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the July sales rate.

The consensus is for 583 thousand SAAR, unchanged from 571 thousand in July.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for September.

12:45 PM: Speech by Fed Chair Janet Yellen, Inflation, Uncertainty, and Monetary Policy, 59th NABE Annual Meeting, Cleveland, Ohio

—– Wednesday, Sept 27th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.8:30 AM: Durable Goods Orders for August from the Census Bureau. The consensus is for a 1.5% increase in durable goods orders.

10:00 AM: Pending Home Sales Index for August. The consensus is for a 0.1% decrease in the index.

—– Thursday, Sept 28th —–

8:30 AM ET: The initial weekly unemployment claims report will be released. The consensus is for 270 thousand initial claims, up from 259 thousand the previous week.8:30 AM: Gross Domestic Product, 2nd quarter 2017 (Third estimate). The consensus is that real GDP increased 3.1% annualized in Q2, up from second estimate of 3.0%.

11:00 AM: the Kansas City Fed manufacturing survey for September.

—– Friday, Sept 29th —–

Early: Reis Q3 2017 Office Survey of rents and vacancy rates.8:30 AM: Personal Income and Outlays for August. The consensus is for a 0.3% increase in personal income, and for a 0.1% increase in personal spending. And for the Core PCE price index to increase 0.2%.

9:45 AM: Chicago Purchasing Managers Index for September. The consensus is for a reading of 58.6, down from 58.9 in August.

10:00 AM: University of Michigan’s Consumer sentiment index (final for September). The consensus is for a reading of 97.2, unchanged from the preliminary reading 97.6.


Published at Sat, 23 Sep 2017 12:09:00 +0000

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Fed QT Stocks, Gold Impact


Fed QT Stocks, Gold Impact

By: Adam Hamilton | Fri, Sep 22, 2017

This week’s landmark Federal Open Market Committee decision to launch quantitative tightening is one of the most-important and most-consequential actions in the Federal Reserve’s entire 104-year history. QT changes everything for world financial markets levitated by years of quantitative easing. The advent of the QT era has enormous implications for stock markets and gold that all investors need to understand.

This week’s FOMC decision to birth QT in early October certainly wasn’t a surprise. To the Fed’s credit, this unprecedented paradigm shift had been well-telegraphed. Back at its mid-June meeting, the FOMC warned “The Committee currently expects to begin implementing a balance sheet normalization program this year”. Its usual FOMC statement was accompanied by an addendum explaining how QT would likely unfold.

That mid-June trial balloon didn’t tank stock markets, so this week the FOMC decided to implement it with no changes. The FOMC’s new statement from Wednesday declared, “In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.” And thus the long-feared QT era is now upon us.

The Fed is well aware of how extraordinarily risky quantitative tightening is for QE-inflated stock markets, so it is starting slow. QT is necessary to unwind the vast quantities of bonds purchased since late 2008 via QE. Back in October 2008, the US stock markets experienced their first panic in 101 years. Ironically it was that earlier 1907 panic that led to the Federal Reserve’s creation in 1913 to help prevent future panics.

Technically a stock panic is a 20%+ stock-market plunge within two weeks. The flagship S&P 500 stock index plummeted 25.9% in just 10 trading days leading into early October 2008, which was certainly a panic-grade plunge! The extreme fear generated by that rare anomaly led the Fed itself to panic, fearing a new depression driven by the wealth effect. When stocks plummet, people get scared and slash their spending.

That’s a big problem for the US economy over 2/3rds driven by consumer spending, and could become self-reinforcing and snowball. The more stocks plunge, the more fearful people become for their own financial futures. They extrapolate the stock carnage continuing indefinitely and pull in their horns. The less they spend, the more corporate profits fall. So corporations lay off people exacerbating the slowdown.

The Fed slashed its benchmark federal-funds interest rate like mad, hammering it to zero in December 2008. That totally exhausted the conventional monetary policy used to boost the economy, rate cuts. So the Fed moved into dangerous new territory of debt monetization. It conjured new money out of thin air to buy bonds, injecting that new cash into the real economy. That was euphemistically called quantitative easing.

The Fed vehemently insisted it wasn’t monetizing bonds because QE would only be a temporary crisis measure. That proved one of the biggest central-bank lies ever, which is saying a lot. When the Fed buys bonds, they accumulate on its balance sheet. Over the next 6.7 years, that rocketed a staggering 427% higher from $849b before the stock panic to a $4474b peak in February 2015! That was $3625b of QE.

While the new QE bond buying formally ended in October 2014 when the Fed fully tapered QE3, that $3.6t of monetized bonds remained on the Fed’s balance sheet. As of the latest-available data from last week, the Fed’s BS was still $4417b. That means 98.4% of all the Fed’s entire colossal QE binge from late 2008 to late 2014 remains intact! That vast deluge of new money created remains out in the economy.

Don’t let the complacent stock-market reaction this week fool you, quantitative tightening is a huge deal. It’s the biggest market game-changer by far since QE’s dawn! Starting to reverse QE via QT radically alters market dynamics going forward. Like a freight train just starting to move, it doesn’t look scary to traders yet. But once that QT train gets barreling at full speed, it’s going to be a havoc-wreaking juggernaut.

QT will start small in the imminent Q4’17, with the Fed allowing $10b per month of maturing bonds to roll off its books. The reason the Fed’s QE-bloated balance sheet has remained so large is the Fed is reinvesting proceeds from maturing bonds into new bonds to keep that QE-conjured cash deployed in the real economy. QT will slowly taper that reinvestment, effectively destroying some of the QE-injected money.

These monthly bond rolloffs will start at $6b in Treasuries and $4b in mortgage-backed securities. Then the Fed will raise those monthly caps by these same amounts once a quarter for a year. Thus over the next year, QT’s pace will gradually mount to its full-steam speed of $30b and $20b of monthly rolloffs in Treasuries and MBS bonds. The FOMC just unleashed a QT juggernaut that’s going to run at $50b per month!

When this idea was initially floated back in mid-June, it was far more aggressive than anyone thought the Yellen Fed would ever risk. $50b per month yields a jaw-dropping quantitative-tightening pace of $600b per year! These complacent stock markets’ beliefs that such massive monetary destruction won’t affect them materially is ludicrously foolish. QT will naturally unwind and reverse the market impact of QE

This hyper-easy Fed is only hiking interest rates and undertaking QT for one critical reason. It knows the next financial-market crisis is inevitable at some point in the future, so it wants to reload rate-cutting and bond-buying ammunition to be ready for it. The higher the Fed can raise its federal-funds rate, and the lower it can shrink its bloated balance sheet, the more easing firepower it will have available in the future.

But QT has never before been attempted and is extremely risky for these QE-levitated stock markets. So the Fed is attempting to thread the needle between preparing for the next market crisis and triggering it. Yellen and top Fed officials have been crystal-clear that they have no intention of fully unwinding all the QE since late 2008. Wall Street expectations are running for a half unwind of the $3.6t, or $1.8t of total QT.

At the full-speed $600b-per-year QT pace coming in late 2018, that would take 3 years to execute. The coming-year ramp-up will make it take longer. So these markets are likely in for fierce QT headwinds for several years or so. At this week’s post-FOMC-decision press conference, Janet Yellen took great pains to explain the FOMC has no intentions of altering this QT-pacing plan unless there is some market calamity.

Yellen was also more certain than I’ve ever heard her on any policy decisions that this terminal $50b-per-month QT won’t need to be adjusted. With QT now officially started, the FOMC is fully committed. If it decides to slow QT at some future meeting in response to a stock selloff, it risks sending a big signal of no confidence in the economy and exacerbating that very selloff! Like a freight train, QT is hard to stop.

With stock markets at all-time record highs this week, QT’s advent seems like no big deal to euphoric stock traders. They are dreadfully wrong. CNBC’s inimitable Rick Santelli had a great analogy of this. Just hearing a hurricane is coming is radically different than actually living through one. QT isn’t feared because it isn’t here and hasn’t affected markets yet. But once it arrives and does, psychology will really change.

Make no mistake, quantitative tightening is extremely bearish for these QE-inflated stock markets. Back in late July I argued this bearish case in depth. QT is every bit as bearish for stocks as QE was bullish! This first chart updated from that earlier essay shows why. This is the scariest and most-damning chart in all the stock markets. It simply superimposes that S&P 500 benchmark stock index over the Fed’s balance sheet.

Between March 2009 and this week’s Fed Day, the S&P 500 has powered an epic 270.8% higher in 8.5 years! That makes it the third-largest and second-longest stock bull in US history. Why did that happen? The underlying US economy sure hasn’t been great, plodding along at 2%ish growth ever since the stock panic. That sluggish economic growth has constrained corporate-earnings growth too, it’s been modest at best.

Stocks are exceedingly expensive too, with their highest valuations ever witnessed outside of the extreme bull-market toppings in 1929 and 2000. The elite S&P 500 component companies exited August with an average trailing-twelve-month price-to-earnings ratio of 28.1x! That’s literally in formal bubble territory at 28x, which is double the 14x century-and-a-quarter fair value. Cheap stocks didn’t drive most of this bull.

And if this bull’s gargantuan gains weren’t the product of normal bull-market fundamentals, that leaves quantitative easing. A large fraction of that $3.6t of money conjured out of thin air by the Fed to inject into the economy found its way into the US stock markets. Note above how closely this entire stock bull mirrored the growth in the Fed’s total balance sheet. The blue and orange lines above are closely intertwined.

Those vast QE money injections levitated stock markets through two simple mechanisms. The massive and wildly-unprecedented Fed bond buying forced interest rates to extreme artificial lows. That bullied traditional bond investors seeking income from yields into far-riskier dividend-paying stocks. Super-low interest rates also served as a rationalization for historically-expensive P/E ratios rampant across the stock markets.

While QE directly lifted stocks by sucking investment capital out of bonds newly saddled with record-low yields, a secondary indirect QE impact proved more important. US corporations took advantage of the Fed-manipulated extreme interest-rate lows to borrow aggressively. But instead of investing all this easy cheap capital into growing their businesses and creating jobs, they squandered most of it on stock buybacks.

QE’s super-low borrowing costs fueled a stock-buyback binge vastly greater than anything seen before in world history. Literally trillions of dollars were borrowed by elite S&P 500 US corporations to repurchase their own shares! This was naked financial manipulation, boosting stock prices through higher demand while reducing shares outstanding. That made corporate earnings look much more favorable on a per-share basis.

Incredibly QE-fueled corporate stock buybacks have proven the only net source of stock-market capital inflows in this entire bull market since March 2009! Elite Wall Street banks have published many studies on this. Without that debt-funded stock-buyback frenzy only possible through QE’s record-low borrowing rates, this massive near-record bull wouldn’t even exist. Corporations were the only buyers of their stocks.

QE’s dominating influence on stock prices is unassailable. The S&P 500 surged in its early bull years until QE1 ended in mid-2010, when it suffered its first major correction. The Fed panicked again, fearing another plunge. So it birthed and soon expanded QE2 in late 2010. Again the stock markets surged on a trajectory perfectly paralleling the Fed’s balance-sheet growth. But stocks plunged when QE2 ended in mid-2011.

The S&P 500 fell 19.4% over the next 5.2 months, a major correction that neared bear-market territory. The Fed again feared a cascading negative wealth effect, so it launched Operation Twist in late 2011 to turn stock markets around. That converted short-term Treasuries to long-term Treasuries, forcing long rates even lower. As the stock markets started topping again in late 2012, the Fed went all out with QE3.

QE3 was radically different from QE1 and QE2 in that it was totally open-ended. Unlike its predecessors, QE3 had no predetermined size or duration! So stock traders couldn’t anticipate when QE3 would end or how big it would get. Stock markets surged on QE3’s announcement and subsequent expansion a few months later. Fed officials started to deftly use QE3’s inherent ambiguity to herd stock traders’ psychology.

Whenever the stock markets started to sell off, Fed officials would rush to their soapboxes to reassure traders that QE3 could be expanded anytime if necessary. Those implicit promises of central-bank intervention quickly truncated all nascent selloffs before they could reach correction territory. Traders realized that the Fed was effectively backstopping the stock markets! So greed flourished unchecked by corrections.

This stock bull went from normal between 2009 to 2012 to literally central-bank conjured from 2013 on. The Fed’s QE3-expansion promises so enthralled traders that the S&P 500 went an astounding 3.6 years without a correction between late 2011 to mid-2015, one of the longest-such spans ever! With the Fed jawboning negating healthy sentiment-rebalancing corrections, psychology grew ever more greedy and complacent.

QE3 was finally wound down in late 2014, leading to this Fed-conjured stock bull stalling out. Without central-bank money printing behind it, the stock-market levitation between 2013 to 2015 never would have happened! Without more QE to keep inflating stocks, the S&P 500 ground sideways and started topping. Corrections resumed in mid-2015 and early 2016 without the promise of more Fed QE to avert them.

In mid-2016 the stock markets were able to break out to new highs, but only because the UK’s surprise pro-Brexit vote fueled hopes of more global central-bank easing. The subsequent extreme Trumphoria rally since the election was an incredible anomaly driven by euphoric hopes for big tax cuts soon from the newly-Republican-controlled government. But Republican infighting is making that look increasingly unlikely.

The critical takeaway of the entire QE era since late 2008 is that stock-market action closely mirrored whatever the Fed was doing. Ex-Trumphoria, all this bull’s massive stock-market gains happened when the Fed was actively injecting trillions of dollars of QE. When the Fed paused its balance-sheet growth, the stock markets either corrected hard or stalled out. These stock markets are extraordinarily QE-dependent.

The Fed’s balance sheet has never materially shrunk since QE was born out of that 2008 stock panic. Now quantitative tightening will start ramping up in just a couple weeks for the first time ever. If QE is responsible for much of this stock bull, and certainly all of the extreme levitation from 2013 to 2015 due to the open-ended QE3, can QT possibly be benign? No freaking way friends! Unwinding QE is this bull’s death knell.

QE was like monetary steroids for stocks, artificially ballooning this bull market to monstrous proportions. Letting bonds run off the Fed’s balance sheet instead of reinvesting effectively destroys that QE-spawned money. QE made this bull the grotesque beast it is, so QT is going to hammer a stake right through its heart. This unprecedented QT is even more dangerous given today’s bubble valuations and rampant euphoria.

Investors and speculators alike should be terrified of $600b per year of quantitative tightening! The way to play it is to pare down overweight stock positions and build cash to prepare for the long-overdue Fed-delayed bear market. Speculators can also buy puts in the leading SPY SPDR S&P 500 ETF. Investors can go long gold via its own flagship GLD SPDR Gold Shares ETF, which tends to move counter to stock markets.

Gold was hit fairly hard after this week’s FOMC decision announcing QT, which makes it look like QT is bearish for gold. Nothing could be farther from the truth. Gold’s post-Fed selloff had nothing at all to do with QT! At every other FOMC meeting, the Fed also releases a summary of top Fed officials’ outlooks for future federal-funds-rate levels. This so-called dot plot was widely expected to be more dovish than June’s.

Yellen herself had given speeches in the quarter since that implied this Fed-rate-hike cycle was closer to its end than beginning. She had said the neutral federal-funds rate was lower than in the past, so gold-futures speculators expected this week’s dot plot to be revised lower. It wasn’t, coming in unchanged from June’s with 3/4ths of FOMC members still expecting another rate hike at the FOMC’s mid-December meeting.

This dot-plot hawkish surprise totally unrelated to QT led to big US-dollar buying. Futures-implied rate-hike odds in December surged from 58% the day before to 73% in the wake of the FOMC’s decision. So gold-futures speculators aggressively dumped contracts, forcing gold lower. That reaction is irrational, as gold has surged dramatically on average in past Fed-rate-hike cycles! QT didn’t play into this week’s gold selloff.

This last chart superimposes gold over that same Fed balance sheet of the QE era. Gold skyrocketed during QE1 and QE2, which makes sense since debt monetizations are pure inflation. But once the open-ended QE3 started miraculously levitating stock markets in early 2013, investors abandoned gold to chase those Fed-conjured stock-market gains. That blasted gold into a massive record-setting bear market.

In a normal world, quantitative easing would always be bullish for gold as more money is injected into the economy. Gold’s monetary value largely derives from the fact its supply grows slowly, under 1% a year. That’s far slower than money supplies grow normally, let alone during QE inflation. Gold’s price rallies as relatively more money is available to compete for relatively less physical gold. QE3 broke that historical relationship.

With the Fed hellbent on ensuring the US stock markets did nothing but rally indefinitely, investors felt no need for prudently diversifying their portfolios with alternative investments. Gold is the anti-stock trade, it tends to move counter to stock markets. So why bother with gold when QE3 was magically levitating the stock markets from 2013 to 2015? That QE3-stock-levitation-driven gold bear finally bottomed in late 2015.

Today’s gold bull was born the very next day after the Fed’s first rate hike in 9.5 years in mid-December 2015. If Fed rate hikes are as bearish for gold as futures speculators assume, why has gold’s 23.7% bull as of this week exceeded the S&P 500’s 22.8% gain over that same span? Not even the Trumphoria rally has enabled stock markets to catch up with gold’s young bull! Fed rate hikes are actually bullish for gold.

The reason is hiking cycles weigh on stock markets, which gets investors interested in owning counter-moving gold to re-diversity their portfolios. That’s also why this new QT era is actually super-bullish for gold despite the coming monetary destruction. As QT gradually crushes these fake QE-inflated stock markets in coming years, gold investment demand is going to soar again. We’ll see a reversal of 2013’s action.

That year alone gold plunged a colossal 27.9% on the extreme 29.6% S&P 500 rally driven by $1107b of fresh quantitative easing from the massive new QE3 campaign! That 2013 gold catastrophe courtesy of the Fed bred the bearish psychology that’s plagued this leading alternative asset ever since. At QT’s $600b planned annual pace, it will take almost a couple years to unwind that epic $1.1t QE seen in 2013 alone.

Interestingly the Wall-Street-expected $1.8t of total QT coming would take the Fed’s balance sheet back down to $2.6t. That’s back to mid-2011 levels, below the $2.8t in late 2012 when QE3 was announced. Gold averaged $1573 per ounce in 2011, and it ought to head much higher if QT indeed spawns the next stock bear. That’s the core bullish-gold thesis of QT, that falling stock prices far outweigh monetary destruction.

Stock bears are normal and necessary to bleed off excessive valuations, but they are devastating to the unprepared. The last two ending in October 2002 and March 2009 ultimately hammered the S&P 500 49.1% and 56.8% lower over 2.6 and 1.4 years! If these lofty QE-levitated stock markets suffer another typical 50% bear during QT, huge gold investment demand will almost certainly catapult it to new record highs.

These QE-inflated stock markets are doomed under QT, there’s no doubt. The Fed giveth and the Fed taketh away. Stock bears gradually unfold over a couple years or so, slowly boiling the bullish frogs. So without a panic-type plunge, the tightening Fed is going to be hard-pressed to throttle back QT without igniting a crisis of confidence. As QT slowly strangles this monstrous stock bull, gold will really return to vogue.

The key to thriving and multiplying your fortune in bull and bear markets alike is staying informed, about broader markets and individual stocks. That’s long been our specialty at Zeal. My decades of experience both intensely studying the markets and actively trading them as a contrarian is priceless and impossible to replicate. I share my vast experience, knowledge, wisdom, and ongoing research in our popular newsletters.

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The bottom line is the coming quantitative tightening is incredibly bearish for these stock markets that have been artificially levitated by quantitative easing. QT has never before been attempted, let alone in artificial QE-inflated stock markets trading at bubble valuations and drenched in euphoria. All the stock-bullish tailwinds from years of QE will reverse into fierce headwinds under QT. It truly changes everything.

The main beneficiary of stock-market weakness is gold, as the leading alternative investment that tends to move counter to stock markets. The coming QT-driven overdue stock bear will fuel a big renaissance in gold investment to diversify stock-heavy portfolios. And the Fed can’t risk slowing or stopping QT now that it’s officially triggered. The resulting crisis of confidence would likely exacerbate a major stock-market selloff.

By Adam Hamilton

Adam Hamilton

Adam Hamilton, CPA

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Published at Fri, 22 Sep 2017 09:26:41 +0000

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