October 29, 2019
MarketWatch reported last week that the average daily trading volume in the S&P 500 is now at a 10-year low. Furthermore, trading in the S&P 500 over the past 90 days represented only 7% of the overall market capitalization, compared with an average of 21% between the years 2010 through 2013 – two-thirds less.
There are a variety of reasons why trading volume in the S&P 500 is now running just one-third of what it was six to nine years ago. The first reason is obviously the boom in indexing and ETFs, where investors typically do not trade as much. The second reason is the negative news on financial networks, which has spooked many investors, keeping many of them on the sidelines and out of stocks, fearing the next crash.
Historically, when the stock market rallies while many investors are on the sidelines, typically investors pour back into the market when it is near a former market peak in an obvious attempt to “catch up,” and that seems to be what is suddenly happening now. Not only are many third-quarter earnings coming in better than analysts had expected, but many companies are issuing positive guidance for coming quarters.
Furthermore, since third-quarter earnings represent the “trough” for the S&P 500, higher guidance seems to be a “given,” since year-over-year comparisons will be much more favorable in the upcoming quarters. For lack of a better word, I expect that superior stocks will continue to “melt up” due to this recent lack of volume, which boils down to a relative lack of liquidity when the big money pours back into the market.
As the FOMC Meets, Most Economic Statistics Continue to be “Downbeat”
The Federal Open Market Committee (FOMC) meets today in one of their eight-times-a-year gatherings, and I feel they are likely to cut rates once more, due to a string of downbeat economic statistics of late.
Last Tuesday, the National Association of Realtors announced that existing home sales declined 2.2% in September, down to an annual pace of 5.38 million. Economists were expecting only a 0.7% decline, so this was a bit of a disappointment. In the past 12 months, existing home sales have risen 3.9%, but they have trailed off recently. Lawrence Yun, chief economist for the National Association of Realtors, said, “The housing market is in an unbalanced situation,” due to rising prices and a lack of inventory.
On the plus side, median home prices have risen for 91 consecutive months and are up 5.9% in the past 12 months. A 4.1-month supply of existing homes for sale is abnormally tight and should continue to boost home prices. However, the continuing decline in the volume of sales might prompt a rate cut this week.
Then, on Thursday, the Commerce Department announced that durable goods orders declined 1.1% in September, significantly lower than the economists’ consensus estimate of a 0.8% decline. In the past 12 months, durable goods orders have fallen 5.4% and are now running at the slowest pace in over three years. Transportation orders remain weak since commercial aircraft orders declined almost 12%, while auto parts declined 1.6%. Clearly, Boeing’s woes and the recent GM strike are depressing transportation orders. Even when you exclude transportation, durable goods orders still declined 0.3% in September.
In summary, the weakest durable goods numbers in over three years and a downbeat existing home sales report last week should convince the FOMC to cut key interest rates 0.25% tomorrow.
Before closing, I want to remind you that the seasonally strongest time of year is just around the corner. November and December are historically strong months when we gather for family, friends, food, and football around Thanksgiving and Christmas, times when we naturally cheer up. Consumer and investor sentiment both tend to rise. Furthermore, there is a lot of pension funding as well as gifting to kids and grandkids that often involve stock market gifts. The political circus should also be much less distracting, since politicians know that voters tend to be much more distracted from political news during holidays.