Market Brief – Wednesday 10/17/18

U.S. stocks started the day in the red, but buyers came to the rescue to push prices higher. Investors continue to believe that U.S. stocks are a safe haven and are immune to any economic downturns. While in the short-term such views can be accurate, stock prices have always fallen during every economic downturn.

The business cycle isn’t dead, and this cycle will come to an end. The only difference is investors haven’t learned their lesson about buying stocks at ultra-high valuations. One would think the last two recessions would have taught investors that, but perhaps this time is different.

Housing starts fell -5.3% MoM and housing permits fell -0.6% MoM. The housing market is a big generator of new money into the economy, so when housing slows, so does the economy. Mortgage applications fell -7.1% last week to their lowest level since 2000. Since new loans create money into the economy, falling mortgage applications support my opinion that the money supply will continue to decelerate and eventually contract.

Keep in mind, 17 out of the past 21 monetary decelerations led to a recession and every contraction in the growth rate of the money supply has triggered a recession. Mortgage applications are a leading indicator of where the economy is headed and are also indicating long-term interest rates will fall.

The Federal Reserve released their minutes from their last meeting which indicated they are likely to take the Federal Funds rate above the “neutral” rate. The neutral rate is where interest rates and the economy are balanced. This means the Fed believes the economy is running too hot and needs to be cooled off again. Investors responded by buying stocks and selling bonds, which they should do the exact opposite.

Stocks were mostly flat on the day after recovering their early losses. Treasury yields were up slightly. Both physical gold and the gold miners fell, which means a retest of their respective 50-day moving averages should be in the near future. A successful retest of their 50-DMAs should be considered bullish. Agricultural commodities were down a touch on the day.

The EIA reported a sizeable build in crude inventories with a small decline in gasoline inventories. The market has used rising oil prices as an excuse for rising bond yields, as rising oil prices are considered inflationary. With refineries closing down for maintenance, oil inventories should have fallen and gasoline inventories should have fallen even more.