We have seen some bad news this week with the coronavirus and the US economy as it came out that for 2019 the US GDP only grew 2.3% instead of the promised 3%. This helped explain some market drops that came on Monday and Thursday morning but the market did not collapse. This tells us what the real trend is and guides us to where the real opportunities now are.
Hello! This is Mike Swanson and you’re listening to the Wall Street podcast.
Often I do these podcasts with a special guest. Today, it’s just me, and for two reasons:
First of all, I like to do YouTube videos and then when I’m done making the video, usually I’m walking around, I’ll put some charts into it about the stock market, but it is too cold outside for me to wanna walk around today, so I’m doing an audio recording inside of my house and second reason is, I’m taking advantage of that, to do an experiment.
I’m gonna send this audio recording off to a company when it’s complete, I’m going to see if they can make a text transcript of it fast enough that I’ll be able to get it on the website tomorrow, as a blog post.
We’ll see if they can accomplish that mission, but when it comes to the stock market there are a couple of points I want to make with you today.
First of all, the trend is obvious and that is that the stock market’s not going to crash – it’s not gonna soar – instead it’s a chop situation. The stock market took a dump with the Dow for 450 points on Monday. There was some bad news associated with that drop, but on Tuesday we bounced. Thursday morning – a nasty opening. But the market bounced, again, so it has not been able to collapse to the downside, but it’s not a position to soar either.
And yes, there’s been some bad news, but that bad news is not been enough to derail the stock market because we’re in a shop, situation, not a collapse situation, but a shop. That’s the defining trend.
And yes, there has been bad news. Let’s talk about that. First of all, the coronavirus coming into this week, I was hopeful that the situation would die out that cases. But then it spread to the United States. We know we got a couple but it’s not a big deal, but what is a big deal, is that on Tuesday, the World Health Organization made an announcement. They said they looked at the situation and it wasn’t that bad that it was not a global health crisis. But then on Thursday before the stop market opened up, they said – uh-oh, it is a global health crisis.
It means that’s going be a bigger impact everywhere around the world with the economies than we were expecting a week ago. Just the way it is, this doesn’t mean you should be scared as you shouldn’t be afraid to go outside of your house or afraid to travel or afraid to live your life.
But it means that there is going be an adverse economic impact in China for a longer time than we thought and imagined. There’s cities in China, in complete lock-down. Now, that is going to last probably, through the spring. That’s typically how long it takes for a virus of this sort to just simply die out.
So that kind of impacted the markets this week in a negative way, but a more important news item hit the United States when it comes to the economy, and that is that Thursday morning fourth quarter GDP numbers were released and they showed that last year, in the fourth quarter GDP growth was it 2.1%.
It was growth, but lower than expected, but even worse, they have figured out that for 2019 GDP growth was clocked in for 2.3% for the year, that’s a bad number, because we were promised 3% growth – we were promised that tax cuts and mega-stimulus which is what we’re getting from the government would make 3% growth easy. We had a massive tax cut boost and defense spending to provide jobs and money for defense contracting companies that would trickle on the rest of us with the economy helping to create a trillion dollar deficit but with the tax cuts would create 3% percent economic growth and it did not happen.
So the details also show that in aggregate, corporate investment spending is negative. So we’re not in a boom situation when it comes to US economy, and the growth is not as good as we thought it would be.
So, when stocks report growth not as good as can be, they often sell off.
We’ve seen that this week, with some individual stocks, we saw that with Facebook (NASDAQ: FB).
Facebook was down on Thursday over 5%, because they announced that costs were higher than expected and revenue growth was less than expected. Bad news set the stock tumbling. It wasn’t the only one. UPS also got hit for a 6% drop Thursday because of all these problems – the global economic threat of the coronavirus slowing things down hits UPS (NYSE: UPS) harder than it does something like Facebook even, or Netflix. So the UPS stock got hit very hard. That’s what happens when stocks don’t meet expectations – often they dump. However, for the bad GDP numbers and the coronavirus bad news, the stock market is not dumping off all this, because the trend of the stock market is chop.
Why is the trade the stock market in a chop trend?
That’s the question to ask.
The question to ask yourself is not… Oh, I turned on TV…..And the stock markets down for DOW 450 points. Is this start of the crash?
Well, obviously going into the end of last year, the stock market went up. It went up huge and broke out towards the end of October, and almost never went down on any given single-day – every single week. It came into this year with an overbought condition.
When something hits an overbought condition as the stock market was coming into the beginning of this year, one or two things can happen – either you can get a continuation in which things become extremely unsustainable and set the stage for a real collapse or a huge drop.
That’s what happened in January. 2018. That’s not what happened here. Instead, the stock market did, what the other thing it can do, and that is the momentum slows.
You can then get a consolidation – a dip – a correction – that can play out for a couple of weeks.
That’s what we’re in, and it’s probably going to continue into the next month.
So that’s what’s going on with the stock market.
In a certain sense, you could tell yourself not much is happening with the S&P 500 right now, or the Dow hopping up and down. It’s hard to trade a situation like that, but there’s better things to trade. There’s some individual stocks that move in a sustainable manner. The right ones go up; they go up more than the market averages do.
You also have things that are kinda washing out on this drop – that are reaching a much more oversold level than the stop market has. The S&P 500 is really not oversold. It’s barely even dropped off the high, but some things have come down. The energy complex is something that I think is enticing for the next couple of weeks. Let’s let it build a base and they can turn up. Other commodities are in that situation too,
And of course we got gold and silver, which are now acting once again stronger than the US stock market, because any signs of weakness creates a rotation into gold, silver, which helps mining stocks go up.
We saw that last year. We’re going to see it this year. We going to see it in the years to come, because that’s where we are in the cycle. That’s what I’m excited about, but there’s a lot of stuff going on. And even when the market’s has down days it creates oversold conditions in select sectors that can be taken advantage of. I think we’re going see some bases built in that context in the next couple of weeks.
So those are my thoughts for today and I’ll talk with you later.
-Mike
