OK, so it was a little too easy. You can only go so far on the idea that the economy is slowing so you don't have to worry about the Fed.
That's because you can't come out when you report and say, "OK, we've been doing well, and then the Fed screwed it up, but if they get it right we will be fine."
Nope. These companies extrapolate what happened in the last quarter, even the last months, and the answer is that things look ugly because the rearview mirror says it will be ugly.
It's either that or a decision to practice "underpromise and over deliver," a time-honored practice for the beginning of the year reports.
Let's set the stage for this decline. The first sign that we were going to get hammered came from oil which, at one point was down almost $2. Why does that matter? Because there are a ton of computer programs used by hedge funds that are set to sell the S&P when oil goes down. Don't ask me why the machines do that -- we know that about 90% of the S&P is actually impacted positively by lower oil prices. So the linkage is surreal.
But it has its origins in the measurement of world trade. When there is a whiff of a trade deal oil goes higher. When a trade deal seems far off like today -- when the U.S. turns down an offer or preparatory trade talks -- oil gets hammered. The president doesn't like what he sees from the Chinese so far and so our Treasury Secretary canceled the meeting. It's all about intellectual property NOT dollar trade volume and the Chinese seem unwilling to admit or give ground on this huge issue. If there is no trade deal then there is a belief that the world will continue to slow which is why you would sell oil. If you sell oil then you should sell the S&P because there is a belief that the world is truly slowing and there are enough international companies in the averages to bring them all down, which is what happened.
But isn't our economy insulated from all of this given our strong employment growth? You would think so, but we keep getting fooled by that statistic. This morning we got existing home sales for December and they dropped a staggering 6% -- the slowest sales pace since November 2015. The Mortgage Bankers Association pointed out that existing sales have now decreased for four straight months year over year because of a lack of confidence in the broader economic outlook, stock market volatility and higher mortgage rates.
Now, we could avoid all of this macro gobblegook if it weren't for the impact it is having on individual companies, including great ones like Stanley Black & Decker (SWK) which reported a decent number but gave a horrendous forecast, one that included a big guidedown in large part because of the slowdown in the U.S. flagged by the Mortgage Bankers Association. It added that auto tools were also weak. Jarring. Worse, the international outlook sure won't let them make it up. As James Loree, the CEO of this venerable company, pointed out: "I think we all know that the European economy has slowed quite a bit. Germany went negative, the UK is in chaos and confusion with Brexit, Italy is a disaster." Amazingly they still did their numbers in Europe but that travelogue is hardly encouraging.
And in this environment the Fed chose to raise rates? When I go off on the Fed about its tone deaf lack of homework, it is because of stories like that of Stanley Black & Decker. Sure the models said that this company should have been scorching. That's not what my homework showed. It's not what Stanley Black & Decker called out, either.
No wonder the stock of the company fell 19 points.
Now normally what would happen on a day like today is that we would see money flow into the much more stable pharmaceutical companies. Nope, not today. That's because Johnson & Johnson (JNJ) chose to give a conservative forecast that shocked people and reversed the nascent rally that had been budding toward the end of last week.
Now here, unlike Stanley Black & Decker, I think the company was setting a lower bar so it has some breathing room. Was the company underpromising so it can over-deliver late in the year? I think so and we told club members of ActionALertsPlus.com that we have come to expect that from Johnson & Johnson. I saw nothing that would tell me NOT to buy the stock.
Still it was like a pincer movement with bearish story lines from both hand tools and pharma which left a host of collateral damage including some real nasty action in Home Depot (HD) and Lowe's (LOW) to Allergan (AGN) and Bristol Myers (BMY) .
What are we to make of all of this? I think there will be a rush of traders taking profits betting that we will have some sort of retest based on the damage the Fed has done and could still do by raising rates into a slowdown, as well as a potential breakdown in trade talks and the hammering of Stanley & Black & Decker and JNJ.
In that environment you might as well wait to buy anything other than stocks that have reported fantastic or much better than expected quarters and went up huge and are finally coming back down to earth.
It's hard not to reach that conclusion given the huge run we have had and the propensity for money managers to want to take something off the table so they can buy stock back if we go appreciably lower.
I say you need to be careful how much you sell. There are way too many stocks of companies that are doing well that are still way below their 52-week highs and after today are closed to their lows.
However, I understand the dilemma. How can you tell a good story if you are an industrial when the world is slowing including the U.S. and your company is being hurt by a strong dollar and a tight-fisted Fed? How can you go out and say don't worry about the future when JNJ did sound worried about the future?
To me this is one of those moments when you have to figure out if you can thread the needle. Can you sell now and buy back a few percent down when stocks are now reflecting only the past rate hikes not the future pause? I think that's a tough call, but a realistic one for anyone who can trade, but not those who are looking to invest for the long-term.
