In a normal, quiet summer week we would be lazily considering consumer confidence and the Fed minutes. Instead, the escalating war of words between the U.S. and North Korea has claimed the agenda. Expect many to be asking,
Will the North Korea threat be the catalyst for a market correction?
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Last Week Recap
My notion that last week would feature a discussion of revised price targets was pretty good — for exactly one day! Global tensions claimed the attention of markets. Anyone looking for a reason to sell suddenly had one. This occurred despite good earnings and generally positive economic data.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall decline of 1.43% for the week. With Thursday’s big decline, the sequence of down days, and the accompanying headlines, it probably seemed like more.
Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.
The Silver Bullet
As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. Last week’s deserving winner was Aaron Brown for an excellent analysis of the need for context in reading chart. The article also has a link to past winners and their work. I have another great candidate in mind. I hope that readers and past winners will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
The economic news last week was generally positive.
- Mortgage delinquencies are at a ten-year low. (Calculated Risk).
- JOLTS report shows continuing strength in the labor market. This is not the best way to estimate overall job growth, although that is the typical interpretation. More importantly, check out the quits rate, (Washington Center for Equitable Growth).
And also, the Beveridge Curve, an indicator of where we are in the business cycle. (BLS)
- Wholesale inventories were slightly higher than expected. The skeptical Steven Hansen (GEI) notes the decrease in the moving average and the recessionary level of the overall series.
- Commercial real estate remains strong. (Scott Grannis).
- Inflation remained tame on both the wholesale and retail fronts. Once again, not all regard this as good news, but it meets our definition.
- Productivity for Q2 rebounded nicely with a gain of 0.9%.
- Small Business optimism increased again, continuing the post-election surge. (Calculated Risk).
- Q2 earnings continue to beat expectations, now growing at 10.1%. This is substantially better than expected at the end of the quarter (6.4%) or the start of the quarter (8.6%). (FactSet).
- Corporate executives see good conditions. These include a reasonable macro outlook, profit rebound despite sluggish GDP and DC gridlock, and low inventories (requiring restocking). (Avondale report on conference calls).
- Rail data were mixed. Steven Hansen (GEI) cuts through the noise in the report with analysis of the “economically intuitive” data and the 4-week moving average.
- Hotel occupancy is lower. Calculated Risk reports a decline of 1.5%, to a level of 74.5%.
- No progress on raising the debt limit. Regardless of the actual outcome, the perception may have an effect. The WSJ reports that 22% of the economists see a government shutdown, with 17% see a default on obligations or missing some payrolls.
- Leading index for commercial real estate “stumbles.” Calculated Risk reports a 3% drop in the Dodge Momentum Index.
In our office, we enjoyed guessing the richest person in various states – getting past the obvious choice in Nebraska and Washington! The Visual Capitalist has something interesting almost every day.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
It is an active economic calendar. I continue to emphasize housing starts and building permits. Retail sales need a rebound – as expected. I do not pay much attention to the leading indicator release, but some swear by it. Several other releases have an impact on GDP calculations.
Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.
Next Week’s Theme
So much for the slow days and the Presidential and Congressional vacations! The North Korean situation has taken center stage, and will probably dominate through most of next week. Investors and pundits alike will be wondering:
Is the North Korean threat the catalyst for a market correction?
I studied the topic extensively to cull the most educational background material, still reflecting a range of opinion. Here are some viewpoints:
Anyone who has been calling for a correction will inform you that “the time is now.” The claim is that a correction-ready market simply needs an excuse. Even Schwab (which has been correctly bullish) is worried that things might be “too good”.
It is a paradise for doomsayers. Need a Survival Condo? Fifteen floors, “nuclear bomb resistant” and including luxury appointments. The cost is a mere $3 million.
The market does not yet fear an actual nuclear outbreak – or else it would be down more. The Economist’s highly-regarded “Buttonwood” column got credit for a clever title: How do you solve a problem like Korea? It is a good story, with a review of past crises. As to the title, the Brits have not been watching the Capitol Steps!
Art Cashin’s humorous story on why you buy the market when there is a nuclear threat. (It is all interesting, but scroll to the last 1:30 for the fun part).
What are the North Korean nuclear capabilities? Estimate are 30-60 bombs including the potential for delivery as far as the US mainland. (CFR).
What about China, Korea’s biggest ally and trading partner? The CFR has a great background piece.
Beijing has consistently urged world powers not to push Pyongyang too hard, for fear of precipitating regime collapse and triggering dangerous military action. “Once a war really happens, the result will be nothing but multiple loss. No one can become a winner,” said Chinese Foreign Minister Wang Yi in April 2017, urging the United States and North Korea to