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Resilience or Indifference = Market Equilibrium

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Resilience or Indifference = Market Equilibrium

There were numerous potentially troubling storylines starting with the attack on Saudi Arabia’s oil infrastructure on Monday and finishing with reports that the China had canceled a visit to Montana farms on Friday. In the middle, a shortage of cash in the banking system led to a spike in the overnight repurchase rates to over 10%, and a FOMC decision to cut rates but with growing dissent on future  policy amongst its members. The market displayed either great resilience or perhaps just extraordinary indifference, as the S&P 500 drifted down 0.51%. A year ago we expressed our concern over that the market was climbing “the wall of whatever”, replacing “worry” from the Wall Street adage with “whatever” because of the then prevailing sanguine attitude in the face of identifiable growing risks.

Here’s what we wrote then: “At North Star, we remain believers in the stock market, recognizing that corporate profits are surging, consumer sentiment is high, while unemployment and interest rates are low. Our enthusiasm remains tempered by all the event risks identified above, as well as the “whatever” attitude that most market participants seem to have adopted. In short, with the market trading at an all-time high, we think it is a good time for investors to be prepared for a moment when the complacency of the crowd gets tested.”

The test came about a month later when a steep sell-off resulted in a decline of almost 20% by Christmas Eve. It’s worth noting that after that elevator ride down, the escalator ride took us to new highs by the end of April. Since then, the S&P 500 has traded in a very narrow 6% range between 2840 on the low and 3020 on the high, closing last week approximately 1% below the upper band. Consumer sentiment remains high while unemployment and interest rates have moved even lower, but corporate  profit growth has stagnated. The twists and turns of the “trade war” continue to influence the mood on Wall Street, albeit to a lesser extent as traders become increasingly desensitized to their headlines. Whether it’s resilience or indifference, perhaps the market has found equilibrium, with a steady domestic economy and very low interest rates providing a counterbalance to the growing list of concerns and risks.

The yield on the Ten-Year Treasury slid 15 basis points to 1.75%, while the Dollar remained firm near a multi-year high. Despite all the headlines, the VIX (CBOE Volatility Index) remained subdued.

This Week:

The economic calendar is pretty busy, with the Core PCE, the Fed’s preferred inflation measure, due on Friday. The forecast is for a rise of 1.8% which would be the strongest reading since January, but still below the 2% target rate. An unexpected surge in that measure would cast doubt on the likelihood of future interest rate cuts.

The state of the trade negotiations between the U.S. and China will continue to grab headlines and influence trading.

The Chicago Cubs will be cleaning out their lockers and heading off to their winter homes. I went with some friends who are obsessive fans to the game against the Cincinnati Reds last Monday which the Cubs won 8-2, capping a 5-game winning streak in which they scored 59 runs. My friends’ enthusiasm was infectious, and motivated me to watch the next game against the Reds as well as the final home stand versus the Cardinals. They lost all 5 games by a total of 6 runs. Ouch. All I can say is, “Go Bears!”.

Stocks on the Move:

(PMD) +8.2%:  Psychemedics Corp., is a US-based company which provides testing services for the detection of drugs of abuse through the analysis of hair samples. The Company announced a new non-exclusive agreement to continue with their current distributor in Brazil. Concerns over this distribution agreement have weighed heavily on PMD shares since their longstanding distribution partner was acquired last year. PMD is a 0.62% holding I the North Star Dividend Fund.

(SCS) +9.5%: Steelcase Inc., is a furniture company primarily based in the United States and has operations in Europe, the Middle East, and Africa. Steelcase markets its products primarily through a network of independent and company-owned dealers. Reported second quarter revenue of $998.0 million and net income of $60.5 million, or diluted earnings of $0.50 per share.  In the prior year, Steelcase reported $875.8 million of revenue and net income of $49.1 million, or diluted earnings of $0.41 per share. “We delivered one of our strongest quarters in the past 20 years, exceeding our expectations,” said Jim Keane, president and CEO.  “These results demonstrate the effectiveness of our growth strategies and reflect the efforts of our employees around the world.  Our new products are strengthening our portfolio in all geographies, our acquisitions and partnerships are providing additional solutions to our dealers and customers, and the war for talent continues to motivate organizations to invest in workspaces that inspire their people.”  SCS is a 1.32% holding in the North Star Dividend Fund.

(CLCT) +11.7%:  Collectors Universe Inc., provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. The Company’s shares continued to rally after posting record results at the end of August and are now up over 160% for the year.  CLCT is a 2.53% holding in the North Star Dividend Fund and a 2.88% holding in the North Star Micro Cap Fund.

Related: The Trade War Influence and a Field Goal

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