This Morning’s Log Entry

Stocks maintained strong gains
throughout the day yesterday, then rallied hard into the close; traders were
more than comfortable being long into the weekend. This pattern of late day
buying during the current rally is hugely bullish.

Funny thing about the latest move in stocks is it
comes amid a somewhat deteriorating backdrop; which has been the case for
some time in Europe and China (for examples), but more recently in the U.S. as well. Our
economic subindex plunged 15.39 points this week to a disconcertingly low 7.69!
Our financial stress subindex, however, conflicts markedly with the economic subindex score; posting a very high 72.73!
At this juncture, given the sensitivity of the
components that make up the latter, the economic weakness could be viewed as
transitory. Time will tell…
As for the equity markets, they’re rallying
globally; which jibes with our financial stress subindex. Clearly, market
participants believe that if or when (the market’s discounting that it’s a “when”)
the China trade issues are put to bed, stocks will be able to work their way to
all time highs. Ironically, the weak data – as long as they don’t spell
recession soon
– are net bullish for stocks; as they keep the Fed at bay. That (new highs) is
my thesis, as long as we don’t jump from the frying pan of China into the fire
of Europe on trade.
The Administration is or was (the market’s
praying “was”) ready to go hot after Europe as soon as it wraps up with China.
The Commerce Department is due to present Trump with the findings of its
study on the national security threat posed by auto imports to the U.S.. And
we’re talking from countries like Japan, as well as Europe. Of course the
credibility of such a notion is zero among all but maybe the most ardent Trump
supporters. Problem is, he has
executive authority to go there if he wants.
Business groups are pushing back hard against
such a move. The Center for Automotive Research warns that a 25% tariff on
autos and parts would cost 367,000 U.S. jobs. And it assumes that South Korea, Mexico and Canada would be exempt due to existing or pending trade agreements!
Some Congressional Republicans are pushing back
as well. Pat Toomey introduced a bill that would subject such acts to
congressional approval. It would also apply retroactively
to steel and aluminum tariffs. The market would scream higher if such a bill
actually became law; as the macroeconomic aspects of dispensing with the protectionist
measures that have been recently thrust onto the scene would do wonders for
production, productivity and animal spirits.
Again, if the Administration pivots away from its
protectionist bent after coming to terms with China, I see very good things for
equities in 2019. If it doesn’t, if it goes after Europe next, it’s likely going
to be another rough year…

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