The president of the United States is being impeached. We still don't have a trade deal. The yield curve has flattened again. The tariffs are beginning to impact bottom lines, as we saw with this morning's shocking number from one of the largest retailers in the world, Dollar Tree (DLTR) . The opioid manufacturers, including bellwether drug company, Johnson & Johnson (JNJ) are facing a criminal probe.
And yet the market can't stop rallying.
What the heck is going on?
Let me run down why all of this is happening:
- While Dollar Tree has had some problems with tariffs, the big guys, Walmart (WMT) , Target (TGT) , Amazon (AMZN) , and, so far, Costco (COST) , haven't felt the pain, which means that their customers haven't felt the pain. So while tariffs have hurt select retailers, and while Manny Chirico, CEO of PVH Corp. (PVH) , the apparel company, says they will begin to hurt next quarter, the sky is falling narrative just hasn't played out. Inflation is subdued. It hasn't really mattered. I can't tell you how few expected this, especially the graybeard economists almost all of whom live in ivory towers and never seem to buy anything.
- The enterprise is very soft, but not as many companies are levered to the enterprise as you might think. Today Hewlett-Packard Enterprise (HPE) told a tale of woe, similar to that of Cisco (CSCO) . There are just too many people having to sign off on deals these days as companies grow conservative, because who in heck knows how much they should budget for in 2020 with the tariffs hanging over them. Big companies, the kinds that buy tens of millions of dollars' worth of equipment, are gun-shy. They don't want to make a mistake. In contrast, though, people are flush and are spending on equipment like crazy, as we saw from Best Buy (BBY) this morning. Kohl's (KSS) last week might have said that women's apparel is weak but Dick's Sporting Goods (DKS) told a different, much more positive story. Hence the dichotomy of stock price direction.
- Maybe a trade deal is in the offing. The talks have taken on new life ever since China said it would respect intellectual property. You and I may think that it's a crock and that China is up to its old tricks, but the president can declare a victory here and say that he's gotten the nation to change its ways. Something that would give the banks and the casino companies more opportunities -- I know, but yes, the casino companies, could be part of any "phase one" deal. The market senses something has changed and it is not eager to be on the wrong side, the hard-line side, of the trade. Instead of worrying about whether you are too long going into the Thanksgiving weekend if you are a hedge fund manager, you are worried about being too lean, or worse, being short if President Donald Trump announced a big deal simultaneously with the Democrats crowing about impeachment. You want to short a bank knowing that China might let it come in without a partner? You want to short American Express (AXP) or Mastercard (MA) or Visa (V) or JPMorgan Chase (JPM) or Goldman Sachs (GS) ? I know I wouldn't. Just too dangerous if they are the ones that get franchises.
- When a company issues an upside surprise, it is insanely rewarded. This morning Burlington (BURL) , the retailer, reported a good quarter and gave you a slight rise in forecast. Initially the stock was actually down on the news. But then it ended up rallying 20 points. Sure, if you missed the quarter, like Dollar Tree, you saw your stock slaughtered. Palo Alto (PANW) saw its core product slightly weaker, but its next generation cyber security offerings were well received. Still, any unexpected weakness shellacs a stock, as we saw from PANW, down almost 30 points. But the misses are palpably fewer than the hits. When you get stocks like Best Buy and Dick's doing better than expected, it doesn't matter that expectations were made lower or were viewed as high post-Macy's (M) and Kohl's, their stocks just rocket.
- As much as the impeachment hearings had good ratings -- it doesn't look like any Republican has broken ranks with the president. Hence, this is more like the attack on Bill Clinton than the impeachment of Richard Nixon. By this point already in the impeachment proceedings, Senate Republicans were deserting Nixon with some making a grand, sweeping point of it. Unless some Republican senators break with the leadership, this will be a proceeding that's dead on arrival -- and none has broken ranks. None. It is entirely possible if this continues, that the Democrats might actually bring the United States, Mexico and Canada trade treaty out of Congress just to show that they aren't obstructionists.
- The hardliners in the Democratic party keep getting beaten up to the point that I think they are beginning to regret being so hardline. I think the seminal moment came when U.S. Sen. Elizabeth Warren said she was putting on hold her plans to basically nationalize health care until the third year of her administration. That pretty much ignited the entire health care group and it is having its first breather today. What an astounding run expected by no one, or at least it would seem so given the reaction by stocks like Centene (CNC) and UnitedHealth Group (UNH) .
- The darned underwritings have slowed to a trickle, which allows the market to catch its breath. Maybe the best thing that could happen to this market was the collapse of WeWork, because it made the underwriters gun-shy and actually willing to do some due diligence, lest they look like idiots. Without all of that new supply, the buybacks sopped up the usual amount of selling and allowed for a rally to be mounted. I think that the underwritings had really been just a pox on the market, especially after the fiasco that was Uber (UBER) . But now even that has found a bottom and you have to be encouraged that a stock like Peloton (PTON) has gotten above the offering.
- M&A was supposed to be on hold, given all of the uncertainty out there. But it has been anything but the case. Plus it is widespread. The brokers made so much sense to get together, and I bet there will be many more in the space as it is ripe for consolidation. There are way too many biotechs and when they merge they merge at gigantic premiums and as long as the buyers, like Novartis (NVS) , go higher, then there will be deals galore.
- Seasonably, we have made it through the worst of the year. Now accounts are unlikely to want to blow out of stocks. If anything, it will be a trial to keep them on the sheets. The biggest risk from here might be not having enough stock to show investors you were bullish, especially given how the competition of interest rates aren't all that compelling.
- Finally, employment is incredibly strong, I mean like lights-out strong. It remains incredibly easy to find a job as anyone who listened to the Dollar Tree call learned, as they are having a hard time finding workers to fill their distribution centers. These are admittedly unskilled jobs, but they are entry level positions that night have gone begging otherwise.
Now usual caveats: There are plenty of possibilities for our president to tweet something errant, but have you noticed he has cooled that of late? China is inherently unreliable when it comes to trade. There could still be a quarter or two that's awry, but today does mark the official end of any real earnings until January, and it looks like whatever damage will be done by them, has been done, until the new year.
(Burlington, Amazon, Cisco, Kohl's, Mastercard, JPMorgan Chase, UnitedHealth Group and Novartis are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
