Stocks Rise Friday, Capping a Terrible, Horrible, No Good Week

My Millennial daughter is a mom these days. When she was in kindergarten, she loved it when I read to her a 1972 children’s book called Alexander and the Terrible, Horrible, No Good, Very Bad Day.” The book has since been made into a movie and a stage musical. You can guess the plot.

I thought of the book’s title this week, while watching the markets gyrate. Stocks closed Friday in the green, a positive ending to an otherwise soul-crushing week. Trading today was volatile. The Dow Jones Industrial Average rallied more than 1,000 points from its session low.

Despite their rise today, the Dow and S&P 500 are in correction territory for the first time in two years. The Dow has had its worst week since January 2016.

Crude oil on Friday fell below $60 per barrel for the first time this year. The U.S. benchmark West Texas Intermediate plunged 3.14% today to close at $59.23 per barrel.

The culprit: Baker Hughes on Friday reported a big jump in the U.S. rig count. The firm said the rig count increased by 26 (the largest jump since April 2013) to 791 (the highest since April 2015). The Permian basin rig count saw the greatest increase to the number of rigs at 10.

Oil production is rising faster than expected. The U.S. Energy Information Administration (EIA) predicted this week that U.S. oil production would top 11 million barrels per day this year. Last month, the agency said the U.S. wouldn’t hit that threshold until November 2019.

See the chart that juxtaposes Baker Hughes and EIA data. Robust production presses on oil prices. Crude fell about 10% this week. The falling price of oil worries investors.

When consensus collapses…

The market swoon underscores the importance of being a contrarian. I’ll cite a timely reason why.

At the World Economic Forum in Davos, Switzerland two weeks ago, the head of the world’s largest hedge fund made a widely reported statement: “If you’re holding cash, you’re going to feel pretty stupid.”

I wonder who feels stupid now. Not you, if you’ve been following my advice. I’ve consistently warned about excessive valuations. For the past few weeks, I’ve recommended protective measures against a correction.

I’ve suggested paring back exposure to momentum stocks, elevating cash levels, and increasing your weighting to inflation hedges. I’ve also advised using stop-loss orders for limiting the level of loss from a dropping stock.

What triggered the market carnage of the past two weeks? Rising bond yields, caused by inflation fears. Those inflation fears are stoked by the $1.5 trillion tax overhaul. It’s starting to dawn on Wall Street that tax cuts could overheat the economy.

Beware of sweeping pronouncements from famous people in power. Bold assertions without nuance usually turn out to be wrong. Whether it’s uttered by a Democrat, a Republican, or a yakker on cable television, the conventional wisdom is almost always misguided.

Leading up to the market rout, the consensus was overwhelmingly bullish. Nosebleed valuations just didn’t seem to matter. We’ve just been reminded that they do matter.

My readers know that I’ve been warning about a correction of at least 10%. The main indices are now about 10% off their all-time highs.

Does Friday’s bounce mean that the correction is over? Don’t bet on it. Valuations remain excessive and risks continue to mount. Political uncertainty will only get worse. Stay on your guard.

Friday Market Wrap

  • DJIA: +1.38% or +330.44 points to close at 24,190.90
  • S&P 500: +1.49% or +38.55 points to close at 2,619.55
  • Nasdaq: +1.44% or +97.33 points to close at 6,874.49

Friday’s Big Gainers

  • Wesco Aircraft Holdings (NYSE: WAIR) +28.24%

Aviation supply chain manager beats on earnings.

  • Alliance One International (NYSE: AOI) +22.69%

Tobacco leaf merchant to expand into cannabis, e-liquids.

  • ION Geophysical (NYSE: IO) +18.87%

Energy services firm beats on earnings and revenue.

Friday’s Big Decliners

  • NGL Energy Partners (NYSE: NGL) -17.05%

Energy MLP disappoints on earnings.

  • Forum Energy Technologies (NYSE: FET) -15.64%

Oilfield services firm posts weak earnings.

  • Elevate Credit (NYSE: ELVT) -15.39%

Lender to non-prime consumers misses on earnings and revenue.

Letters to the Editor

“What role does China play in renewed inflation fears?” — William G.

The huge economic stimulus program China launched immediately after the Global Financial Crisis helped reflate the global economy.

This aggressive program pulled China out of deflation into inflation from late 2008 onwards. This trend in turn fueled price rises in the West. The bill for this stimulus is coming due.

Question about inflation? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

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