Every once in a while you get a confluence, a confluence of great news that turns everyone's head around and makes you say, wait a second, let's stop moaning and let's start buying.
Thursday is one of those days. We got a combination of a restart in talks with China, some strong economic data and terrific employment claims, all of which add up to a rally that defies what people are thinking, which, of course, is a recession is coming.
Before I break down how I see the world right now, let me give you the best anecdotal evidence of where we are, or where we were until this morning's burst of good news.
I was walking down my street last night, on the way to my Bar San Miguel, and a very nice neighbor stopped me and said, "Well, will there be a recession?"
I said, "No, I don't think so."
She then offered her view about how everyone is saying there will be. I told her I wasn't one of those people, and that you have to be careful when the crowd all agrees that one is going to occur.
Then this morning, while I was on my way to "Squawk on the Street," a construction worker reached out, fist bumped after saying he's an avid watcher, but then looked at me with a bit of face of fear, and asked, "We're about to go into recession aren't we? Shouldn't I be worried about my stocks?"
I told him I didn't see a recession coming. He came right back and asked if he should dump his stocks if there is going to be one.
I reiterated that I didn't expect one, but he wasn't buying it. Either way, I told him not to make a move.
What's really happening here? I think there is a combination of a belief that tariffs must cause a recession, because they were integral to the Great Depression's greatness, or horribleness, and the media saying over and over again there has to be a recession coming, because of the way the bond market works.
It's tough to explain the latter to a layperson, so the media simply say that interest rates are doing something they always do before a recession, so we must be having one.
I totally get both. The real impact of tariffs is very hard to explain. An inverted-yield curve where short rates are higher than long ones is almost equally as dense.
Having them both on the table makes it very easy to say that there will be a recession, especially when no one will hold you accountable if there isn't one.
Moreover, there is a visible slowdown vs. last year, so there's no doubt that the trend is down and a trend can be extrapolated pretty easily. A reversal of that trend, a showing of an acceleration, is almost never in the cards. It becomes self-fulfilling, as demonstrated by the queries of my neighbor last night and the construction worker this morning.
But then, you get a day like we have now when you get some real positives and it can counteract even the most self-fulfilling of slowdowns. First, in the never-ending saga of trade talks with China, we learned that the two sides will come to the table with a high ranking Chinese trade official coming here to meet with Treasury Secretary Steven Mnuchin and Trade Rep. Robert Lighthizer. The Chinese Commerce Ministry said in a statement that "serious" mid-level discussions will begin mid-September to prepare for the visit.
While many a media person has declared that the president fibbed when he said he had some talks with the Chinese two weeks ago, it does seem like there had to have been some interaction. You don't get "out of the blue" talking moments.
The cynics always seem to contend that these trade talk stories always come out when the Dow Jones averages are down, but they have been up for the last couple of days. Anyway, the talks sound substantive enough to ignite the cyclicals, which have been badly lagging the overall market. Same with the commodities, which have been totally in the doldrums.
Then we got some really strong ADP payroll data and low unemployment claims, neither of which was expected. I have contended all along that we are most likely not going to have a recession as long as employment is as powerful as it is. We get the Labor Department's non-farm payroll numbers Friday, and they can reverse the ADP numbers for certain. But there's a momentum to what happened here with both numbers being so positive.
Then, after the opening of the market the commerce department reported that new orders for manufacturing goods advance 1.4% in July when the experts were thinking a 1% gain was in the cards. You know how I said it's hard to reverse perceptions? Consider that in June these numbers showed only a .5% advance. Does that sound like a recession to you?
The sum total of all of these positive pieces of data caused interest rates to shoot higher. A climb in interest rates lowers the chances of a further inversion of the yield curve, which then tamps the chatter of a recession.
So what happens with the stock market? Pretty simple: You get a sea change in what is working. Best example? Thursday, Union Pacific (UNP) , one of my favorite companies, slashed its outlook based on a mid-single digit decline in rail carloads, a natural reaction to the cessation of soy trading and the decline in intermodal traffic caused by the trade war.
The stock failed to fall, though, and Thursday it's rallying hard, because of a combination of better economic news here and a possible trade war truce. Of course all the "Chinese stocks," stocks like 3M (MMM) and Honeywell (HON) and Caterpillar (CAT) advance even as, I tell you again and again they don't have the exposure you think they have. The slight rally in commodities like copper and oil are far more important to the likes of CAT than China.
I know so many are worried about higher prices at retail, but one look at the stocks of WATCH, which is Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Home Depot (HD) , with only Amazon not at or fractions of a point away from new highs, tells you what you need to know about retail. It's strong and one of the reasons why it is strong is that we learned that Target is sticking it to the suppliers, telling them to suck it up , to take the tariff increases themselves.
Again, this is my thesis playing out, a thesis that says these five have the power to tell the suppliers what to do. Yes there is that big a concentration of strength in the Big Five.
Finally, what happens when you get these circumstances? You get a bifurcation in tech. The tech that needs the economy to roll forward, to accelerate, goes higher, namely the commodity semiconductors and the ones that don't need the economy to grow, companies like Shopify (SHOP) or Twilio (TWLO) get clocked although even they were able to rally back from some big losses.
How long can this goodness last? I think that's not the question. Nothing has really happened. All trade talks have been failures. All good data has been followed by weak data.
The only thing that has really occurred? Maybe some commentators won't be able to talk about recession at least for a few days, or maybe, if the Labor Department non-farm payroll number is weak, until tomorrow.