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Relief Rally: Stocks Surge on Upbeat Economic News

By John Persinos on March 29, 2018

Sure, headline risk is pervasive. But not all headlines are bad.

Investors today put aside trade war fears and data privacy scandals to focus on encouraging news about employment and inflation. The three main stock indices soared, with battered tech stocks making a comeback.

For the day, the benchmark Technology Select Sector SPDR Fund (XLK) rose 2.00%. All of the FAANG stocks popped higher. Scandal-plagued Facebook (NSDQ: FB) outpaced the group, rising 4.42%.

To quote the famous 1970s ad for antacid tablets: “How do you spell relief?” For investors today, it was spelled: j-o-b-s.

The U.S. Labor Department reported Thursday that initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 215,000 for the week ended March 24. That’s the lowest level since January 1973.

The analyst consensus was for claims to fall to 230,000 in the latest week. Wages rose 0.4% for the third straight month. The jobless rate sits at a 17-year low of 4.1%.

The government also reported Thursday that the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.2% last month.

Over the past 12 months, the rate of PCE inflation rose slightly to 1.8%. The core PCE rate, which removes volatile food and energy prices, edged up to 1.6%.

Consumer spending rose 0.2% in February, half as fast as the 0.4% rise in wages. The dip in spending stemmed from a higher savings rate, which increased for the second straight month to 3.4%. Households are able to save more because of rising incomes and recent tax cuts.

America is close to full employment, inflation remains muted, and consumers are in solid shape. Are investors out of the woods? Nope.

The lost decade…

When I saw “since January 1973” in today’s Labor Department report, it brought to my mind a lot of troubling financial history. The date should have come with an asterisk, because that’s when the stock market crashed, ushering in the Great Bear Market of 1973-1974.

The go-go 1960s, when prosperity seemed limitless, gave way in the 1970s to a combination of recession and inflation (aka stagflation) and rising unemployment.

In the 694 days between January 11, 1973 and December 6, 1974, the Dow Jones Industrial Average lost over 45% of its value, making it the seventh-worst bear market in the history of the Dow. World stock markets tanked as well.

Few saw the crisis coming. The year 1972 had been good for the Dow, with a 12-month gain of 15%.

Many factors unleashed the bear. President Nixon took the U.S. off the gold standard, devaluing the dollar and collapsing the post-war system of monetary management; the massive tabs for the Great Society and Vietnam War came due; overseas competition and technological advancement eroded U.S. manufacturing jobs; OPEC launched an oil embargo… the list goes on.

The 1970s was a lost decade. What finally turned things around?

The Federal Reserve under Chairman Paul Volcker tamed inflation by raising interest rates to Mafia leg-breaker levels. Once inflation was under control, the Fed started to ease. President Reagan’s policies provided stimulus in the form of tax cuts and budget deficits. Plus, according to the historical pattern of the boom-bust cycle, the economy was due for a recovery.

By 1983, the U.S. economy had rebounded. The country entered one of the longest periods of sustained economic growth since World War II. The great bull market of the 1980s took off.

Fast forward to today. The U.S. economy is overdue for a recession. After nine years of ultra-low interest rates, the Federal Reserve is compelled to raise them. Under President Trump, the federal government cut taxes and produced a budget deficit. Problem is, we’re in the late stages of a recovery. When the next crisis hits, policymakers will have few fiscal or monetary tools at their disposal. The stock market correction that we witnessed in the first quarter of 2018 is far from over.

My advice: Position your portfolio for the second quarter. Elevate cash levels, increase exposure to hedges, and trim stakes in “momentum” stocks. The following allocation chart provides guidelines that make sense now.

Worsening disarray in Washington, DC and rising geopolitical tensions have rendered markets considerably more vulnerable to headline risk than they were in 2017.

The myriad woes that hammered stocks in February and March haven’t been resolved.

Trade tensions continue to simmer. The Trump administration remains determined to overhaul in a matter of weeks the international trade rules that took years to write. China is unrepentant in its predatory trade practices.

As an investor, could you afford a lost decade?

Thursday marked the final trading session of the first quarter of 2018. The major averages closed higher today for the first time in three sessions. However, the Dow and S&P 500 posted losses for the quarter, snapping a nine-quarter winning streak. It was the worst quarter in more than two years.

Thursday Market Wrap

  • DJIA: +1.07% or +254.69 points to close at 24,103.11
  • S&P 500: +1.38% or +35.87 points to close at 2,640.87
  • Nasdaq: +1.64% or +114.22 points to close at 7,063.44

Thursday’s Big Gainers

Swiss watchmaker beats on earnings.

Consumer brands conglomerate gets green light from FTC for acquisition.

Bank buys major stake in diversified consumer products company.

Thursday’s Big Decliners

Analytics firm caught up in Facebook controversy.

Gaming retailer provides weak guidance for 2018.

E-commerce firm’s operating results disappoint.

Letters to the Editor

“How will the new tax bill affect tech companies?” — Dave D.

Because of lower taxation at home, tech firms will repatriate overseas cash hoards. The money should fuel organic growth, mergers and acquisitions, research and development, and stock buybacks.

Silicon Valley giants need to find new avenues of growth by gobbling up smaller firms in such breakthrough areas as autonomous cars, artificial intelligence, the Internet of Things, virtual/augmented reality, and the cloud. The tax bill gives these behemoths additional financial firepower. Investors had these tailwinds in mind today, as they bid up tech stocks.

Questions about opportunities in the tech sector? Give me a shout:

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


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Here’s What’s Really Going to Crush the Market

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Or just how dangerous it’s becoming right now. Today.

And there are two reasons for that…

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