Key Takeaways
- China’s Massive Stimulus Aims To Boost The Economy, Cutting Rates And Encouraging Stock Buybacks
- Gold Hits Record High; Oil Prices Remain Low Amid Middle East Tensions And Global Slowdown Concerns
- Investors Should Review Positions, Consider Downside Protection Strategies, And Focus On Long-Term Objectives
It’s been a quiet week thus far. On Tuesday, the S&P 500 edged higher by 0.25% while the Nasdaq Composite was up 0.56%. For the S&P, it was the 40th new closing high of the year. Both the Russell 2000 and Dow Jones Industrial Average were up around 0.2%. Markets feel to me like they’re holding their breath between each piece of major economic data, waiting for clues on the economy and what the Fed will do next.
In the meantime, other central banks are making moves. In China, the People’s Bank of China (PBOC) unleashed a broad set of policies aimed at shoring up their economy. The PBOC cut interest rates. They also lowered the amount of money banks are required to hold, thus encouraging more lending. Mortgage rates were also lowered along with the amount of money required to be put down for a second home. Then lastly, they announced approximately $70 billion would be made available to funds, brokers and insurers to buy stocks, along with another roughly $22 billion to finance stock buybacks of listed companies. It’s a massive stimulus package that was accompanied by expectations for further easing before the end of the year. As a result, China’s stock market rallied 4.3% on Tuesday.
Back here at home, I am watching a couple things that have been getting my attention. Specifically, I’m talking about commodity prices. On Monday, I shared some statistics about how markets have responded when rate easing cycles begin with a half-point cut in rates. History has not been kind to aggressive moves like this and while past results may not be indicative of future performance, commodities appear to be bracing themselves.
On Tuesday, gold closed at a record high of $2677, up 1.4% for the day. While silver prices are not at all-time highs, they’re moving aggressively higher, ending Tuesday up a whopping 5%. At the same time, while off its lows, oil prices remain low. Oil closed at $71.56 on Tuesday and despite the current situation in the Middle East threatening to expand, oil has had what I would characterize as a relatively muted response. This could suggest the market’s belief the current conflict will not spread. Or it could also suggest a slowing global economy and the only reason prices are off their recent lows is the conflict.
Turning to some individual companies making news, shares of automakers are indicated lower this morning following a sector downgrade by Morgan Stanley. Analysts there cited the weak economy in China as a major drag on auto sales. Apple is down just under 1% in premarket after China reported foreign smartphone sales fell 13% in August. Home builder KB Homes is trading lower by 6.5% in the premarket. The company reported earnings after the close Tuesday and trimmed its full year outlook. On an interesting side note, and something that has largely flown under the radar, home builders are having a banner year, up nearly 30%. I attribute that to a steadfast belief interest rates would come down. SAP shares are down 2% in premarket following news the government was charging the company with price fixing. Lastly, Micron Technology is scheduled to report earnings after the close. I’m going to be closely watching this one as their earnings will likely be seen as an indicator for Artificial Intelligence (AI) overall.
Finally, I want to come back to the big picture of China, interest rates and commodity prices. The stimulus from China was massive and has a feeling of near desperation. While the PBOC did suggest more relief could be on the way, all that does is make me think their economy may be weaker than we perceive. Back here at home, the aggressive cut to interest rates, while celebrated initially, could also be seen as concern about our own economy and that concern may well be why we’re seeing commodity prices act the way they’re acting. There’s also news this morning that Berkshire Hathaway has further trimmed its stake in Bank of America and while that datapoint alone may not mean much, it’s worth noting that Berkshire has been unloading a lot of stock of late. Therefore, if you triangulate all these pieces, I think there could be legitimate cause for concern. Earnings season is less than a month away, but I think the forward-looking guidance offered by companies will be heavily scrutinized for signs of what these companies see on the horizon.
For individual investors, this is probably a good time to take inventory of your positions. No one ever went broke taking profits and we have some stocks that have had amazing runs. If you plan to hold positions, strategies like covered strangles, where you sell a covered call and use the proceeds to buy a put can offer downside protection if you’re worried. Or simply buying puts as a form of insurance against existing positions is another possible strategy. Most importantly, as always, I would stick with your investing plans and long-term objectives.
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tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.