So, you want the best of all possible worlds? How about one where retail sales are sluggish and the president decides he may hold off on 25% tariffs on imported cars. That's a recipe for a total romp and that's what we got today in an explosion of buying after a hideous opening.
Look, we have to stipulate what makes a market really tick these days in a world where we are ruled by tariffs and trade with a Fed sideshow. Close followers of the economy and the Fed must find all of what I am about to tell you astonishing but they better get used to it because it's the new dialectic like we've never seen before.
As they say in sports - and this is a lot more like blood sport than it is the economy - let's go to the video tape.
First, this morning we got a retail sales number from the Commerce Department that was incredibly feeble -down .2%. We thought it would be positive but this is the second time in three months that retail sales have been down. Not only that but the weakness was widespread: autos, home centers, and internet stores. Could it be worse than that?
I don't think so.
Immediately interest rates nosedived.
The ten year is now at 2.3%. That's extraordinary. Not that long ago - back in October Jay Powell, the chairman of the Fed, was talking about the economy overheating. He had visions of the economy coming into 2019 with a full head of steam, way too hot, and only he could tame it.
So he plotted one and three, one hike last year and three this year.
In retrospect I struggle about how he could have been so wrong. It really is extraordinary.
The weakness initially sent the market deep in the red.
But not long after, when it looked like the market was going to give up yesterday's gains, the president's people leaked that he is thinking about not putting on tariffs on imported cars. Given that we were about to put 25% tariffs on these imports pretty much any minute, the market reversed and then screamed higher.
I can't stress how important this leaked news is. In one fell swoop Trump went from being a hated protectionist by the elites to being a president that is corralling a coalition of the willing to go against the Chinese.
Of course we have no idea if that's really the case or if Trump didn't want the Dow to give up yesterday's gains. No matter, with tariffs not coming on Japan and Europe euphoric buyers stepped in and bought all the stocks that had been for sale, especially companies with big businesses in Europe like Facebook (FB) and Alphabet (GOOGL) . It didn't hurt that yesterday Alphabet held its "Google Marketing Live" keynote in San Francisco and revealed a plethora of new advertisers and new ad products that actually caused Deutsche Bank to raise numbers on a company that had just been cut a few weeks ago.
Now consider this confluence. You have lower interest rates which causes buyers to flock to stocks with good yields like Kimberly-Clark (KMB) and PepsiCo (PEP) . You have tech stocks going higher on a possible united tariff front.
And you have a neutered Fed, one that's being revealed as way too tight or else we would not be at 2019 lows on long-dated Treasuries.
The anemic retail sales numbers make the president's wacky obsession with Powell about that last rate hike into something that actually looks like policy.
Consider his tweet the other day: "China will be pumping money into their system and probably reducing interest rates as always in order to make up for the business they are, and will be losing. If the Federal Reserve ever did a 'match' it would be game over, we win. In any event China wants a deal."
Given the weak retail sales and the way China does play in the world Trump's hectoring suddenly makes a lot of sense.
I know it can be counterintuitive but this environment is perfect for all companies that do not need a tailwind to make the numbers... In the old days that meant nothing but FANG and our self-made acronym is riding again with Facebook's stock up 42% for the year, Amazon's (AMZN) rallying 24%, Netflix (NFLX) up 32% - astounding given all of the over the top competition, especially from Disney (DIS) , especially with its Hulu augmentation - and finally Alphabet up just 12%, but I expect a lot of positive commentary about the stock now that analysts see that a recommendation change can boost it so far.
Oh, and for those AA aficionados, meaning FAANG, Apple (AAPL) stood out as worth taking a stand on. Why not? If there really is the possibility of a coalition of the willing then how much antipathy can China afford to show Apple. The $880 billion behemoth, so vulnerable to tariffs from all sides might have bought some goodwill here and that would make for a decent return to $200 from the $186 it fell to today before soaring to $191.
Now we also have a whole cohort, the cloud kings that have become go-to names in a slowdown environment. In fact, people seem to make a point - if not a beeline - to tech that does well with no economic tailwind. So Workday (WDAY) roars, and Splunk (SPLK) skyrockets and VMware (VMW) takes off and Twilio (TWLO) explodes higher and Adobe (ADBE) romps. Trade Desk (TTD) , which we spoke to yesterday along with Adobe, just galloped much higher as it should have. It should never have been down to begin with. It's almost as if we are now just rounding up the usual suspects, which include, of course, the fintechs, PayPal (PYPL) , Visa (V) and the like.
Today, though, the rally had a special twist to it. We know that anything health care has been in the doghouse courtesy of the Democrats, sans Biden, who favor the dreaded single payor concept. But the economy seems to have slowed so much that even pharmaceuticals and managed care companies could rally.
There's only one skunk in the party and that's retail. Macy's (M) reported a huge beat this morning and the stock was looking up two points. But then the CEO, Jeff Gennette, said the department store chain could be vulnerable to tariffs on furniture. Remember, Ralph Lauren's (RL) stock got crushed yesterday because of a mention of sweaters and footwear from China that could be hurt by tariffs. Macy's went a step further when Gennette said his numbers are predicated on no larger increase in tariffs. Given that the president now seems to link his popularity to his China bashing, I would say good luck with that.
The tariffs on the next $300 billion in imports should soon be front and center and Macy's analysts will have to bring down numbers. Macy's won't be alone. Almost everyone in its category has some exposure because they have spent years trying to keep costs down by operating in China and now that's blowing up in their faces. As we know from what Fred Smith, the CEO of Fedex (FDX) , told us, you can't just flip a switch and move to Vietnam. As I stare out the windows in One Market in San Francsico, I see gigantic cargo ships ships loaded with up to 21,000 containers and I know they aren't from Cambodia or Thailand or Bangladesh for that matter. The best hope might be to build in Mexico given that Trump's not putting new tariffs on Mexico any time soon and the costs can be much lower than China. What are they waiting for?
Now, there's one last thought: We are seeing far more of a united front on tariffs than I thought possible even a few weeks ago. Lloyd Blankfein, former CEO of Goldman Sachs (GS) , tweeted this morning that they might be a necessary evil. Tom Friedman and Steve Bannon found themselves in a lovefest about tariffs being the only real way to get China to change. Yeah, Friedman the Timesman and Bannon the Wildman, turned statesman/economist. To me these are tectonic shifts that show Trump's move is picking up steam. A betting man would say, after today, that President Xi is feeling the vice grip. I would say that Trump's just doing what he likes to do, move the stock market up with good news when it looks like it is flagging. Who would have thought that the good news may actually be real and the market's making some sense in what has to be one of the most topsy turvy times that I have seen in all my 40 years of investing.
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