Samsung Electronics (SSNLF) issued a fourth quarter profit warning that had similar linkages to the sales warning issued last week by Apple (AAPL). Germany reported a weaker than expected 1.9% decline in industrial production in November. The UK's Brexit plan remains a mystery; and the partial government shutdown in the U.S. continues. Market participants, however, don't seem bothered by any of it -- or anything.
The S&P futures are up 23 points and are trading 0.9% above fair value. The Nasdaq 100 futures are up 61 points and are trading 0.9% above fair value. The Dow Jones Industrial Average futures are up 248 points and are trading 1.1% above fair value.
The satisfying explanation for many regarding the positive bias is that the U.S. and China are talking trade and so far there haven't been any spoilers coming out of those discussions. The absence of any negative headlines, therefore, is being construed as a positive.
Those talks are scheduled to end today, yet President Trump, who will be giving a national address at 9:00 p.m. ET tonight on border security issues, tweeted that, "Talks with China are going very well!"
Trade optimism is a convenient explanation and one that we would suggest isn't wholly sufficient for rationalizing the upside bias this morning.
Other factors that warrant consideration include the following:
- The halo effect of Fed Chair Powell's acknowledgment that the Fed will be patient with its policy approach and would scale back its balance sheet normalization efforts if necessary
- A fear of missing out on further gains
- Attention to discounted valuations
- Rebalancing activity with money shifting out of bonds and into stocks
Basically, the market is riding a wave of improved sentiment just as it rode a wave of negative sentiment a short time ago.
All waves crest. This one will, too, but thus far the bulls remain on top of the wave and haven't been knocked off balance. Their resilience has been part of the bullish equation of late, as it has been comforting to see the market extend its rally effort as opposed to quickly folding on an inclination to sell the strength.
The Treasury market, on the other hand, is getting a taste of selling into strength. The yield on the 10-yr note, which scraped 2.63% at yesterday's low, is up to 2.70% this morning. The 2-yr note yield, which saw 2.46% yesterday, is up to 2.56% today.
Those moves seem to contradict the prevailing view that economic activity is slowing and that the Fed is apt to refrain from raising rates anytime soon. Accordingly, they can be interpreted as an effort to move money out of bonds and into stocks as a risk-on mindset has supplanted the risk-off mindset that won out for much of December.
To wit, the S&P 500 declined 9.2% in December, yet it is up 4.3% from its low last Thursday as the December employment report diminished some of the slowdown concerns and Fed Chair Powell diminished some of the monetary policy concerns, clearing the way for a rebound from short-term oversold conditions.