2020 appears ready to offer up another fascinating display of investor psychology battling the astute, manipulative and oft detrimental forces of poor investment tendencies caused by innate human biases. Investors will continue attempting to divine the proper border between risk and reward. Usually poorly. While hoping the expansive bull can stave off the bears and provide yet one more year’s solid returns.
The road ahead will hold much at which the average traveler will want to stop and stare. The continuing Santa Claus Rally. Bareknuckle politics. Secular rotation and mean reversion. Trade and economic uncertainty. Geopolitics and international intrigue. It’s all there, awaiting your perusal. Like an Oscar Nominated film. So enjoy this “review” of how the film may look, based on what we understand, right here and now.
What follows are not forecasts (a fool’s game) but a list of our expectations, as well as currently perceived opportunities and threats, based upon what we know today.
So let’s get into it. Continue reading
Following the Chief’s 31-20 Super Bowl victory over the Forty Niners, we close out yet another football season. Leaving millions of red-blooded American (and foreign) football fans with no gridiron outlet for eight months. No pre-ordained ritual permitting them to block out the rest of the world while college and NFL games play out before them like visual manna from heaven.
The bright side? The opportunity to focus on other stimulants. Perhaps the newest le Carre novel. The stack of magazines on your desk. Some binge-worthy television. Or (gasp) even the threatened species once known as an afternoon with the family, Devoid of television, screens and other distractions. Or hell, even the stock market.
It’s earnings season, baby!
While more than 110 million Americans tuned into the the previous Sunday night’s grid-iron extravaganza, market observers noted that the stock market’s uptrend remains intact despite the Wuhan coronavirus epidemic that has provide epic media fodder fare and wide. Continue reading
Heading into the final two weeks of 2019, the S&P 500 had soared 28.5 percent, while a bond rally has pushed the yield on 10-year Treasury notes down more than three quarters of a percent. If such gains continue through New Years, it will mark the first time since 1998 when stocks have jumped by at least 20 percent while Treasury yields declined by an equal amount.
More importantly, The Santa Claus Rally has achieved lift off.
At this point, even the skeptical money has begun to find its way into the market. Especially as investors become unnerved by FOMO (fear of missing out), a psychological tendency that impacts human cognition when inundated with the idea of missing out on some positive occurrence or event. Three months ago, these same investors wanted nothing to do with equities. But, tidal flows change quickly. And who can blame them?
We have a strong economy. GDP rose by 2.1 percent in Q3, in line with the consensus and matching the prior quarter. We have the lowest unemployment rate in 50 years. Rising wages. Consumer spending. These represent the kind of fundamentals that should keep the bulls running into next year.
Accordingly, $43 billion has flown into equity funds the last six months, the best capital flows since March 2018. Confidence fueled by an improving global trade outlook and belief in the prospects for global growth.
Which explains why the S&P 500 recently crested above 3,200 for the first time.
Stocks extended their winning streak last week. As the Dow has risen four weeks in a row, the S&P has been higher six weeks in a row, and the Nasdaq has been up seven weeks in a row.
YTD, the Dow began the week up 20.1 percent, the S&P is up 24.5 percent, and the Nasdaq is up 28.7 percent. All occupy new all-time highs. And 2019 still has a month and a half remaining.
Many investors expect to see a powerful Santa Clause (year-end) rally. Especially given the strength of the economy and record low unemployment. Moreover, traders expect the U.S. and China to formalize and sign a phase one trade agreement within the next few weeks. And for the House to pass the USMCA deal by year end, after which it should quickly sail through the Senate.
All of which leaves 2019 looking like a truffle digger’s average day… Investors find themselves in a pretty good place. But they dug through a lot of shit to get there.
2019 marks an historic time for the economy and for markets. Both continue to set record after record. Some market observers believe that a “melt-up” is in play. Whereby stock trajectories go parabolic towards the end of a bull market in one last gasping, quantum leap higher. Consider 1999. A year in which the Nasdaq index rocketed 100 percent higher. Yet, even amid that big move higher, the index incurred five violent pullbacks of roughly 10 percent or more.
In his 2018 letter to shareholders, Warren Buffett sagely counseled, “If you mix your politics with your investment decisions, you’re making a big mistake.”
We’ve long recognized such wisdom. As markets care little for party politics. Preferring to focus on earnings, productivity, efficiency, and other achievement-oriented metrics that rarely resonate through the political spectrum.
Unfortunately, many have ignored Mr. Buffett. Allowing politics to invade their daily lives.
The Kabuki Theater of American politics, and its interminably caustic media coverage, has become like Norway’s summer sun. Omnipresent. Continue reading
Last week saw markets continuing to respond to headlines like Pavlov’s Dog did the dinner bell. Take last Friday’s news that the U.S. could de-list Chinese companies from U.S. exchanges. Equities went from positive territory into a steep, downward slide.
Earlier in the week, impeachment talk had sent investors scurrying like rats from a sinking ship. Until they realized that Republicans still control the Senate. Which likely renders any such proceedings more Kabuki Theater than serious political drama. With less attention being paid to potential outcomes than on the circus leading up to it.
Still, September’s ferocious reputation as the “Year’s Worst Month for Stocks!” proved rather benign. The S&P 500 finished two percent higher. And most indices re-established the upward trendlines in place prior to July’s declines.
Neil Shearing, chief economist at Capital Economics, recently published a provocative and timely client note that we’d like to share with you. It provides a historical perspective on the deterioration of U.S.-China relations, and what could come next. The following provides an edited excerpt. Enjoy.
The decision last week by the US government to impose additional tariffs on imports from China shouldn’t come as a surprise. The political dynamics on both sides of the trade war made it more likely that the conflict between Washington and Beijing would escalate rather than recede. Indeed, we had already factored the new tariffs announced by President Trump into our forecasts.
However, lingering in the background is a more fundamental concern – namely that we may be witnessing the end of globalization. If so, the rapid increase in cross-border movement of goods, services, capital and people that has been the defining feature of the global economy over the past two decades may be about to reverse – with macroeconomic implications that would extend well beyond the narrow impact of tit-for-tat tariffs.
Broader market indices drifted lower last week. Though it could have been worse. Following the previous Thursday’s move higher, the market plummeted four percent. Falling Friday through Wednesday. Only to claw back two percent of those loses last Thursday and Friday.
Why the quantum leap in volatility?
The dreaded yield-curve inversion broke the water’s surface. Leaping and twisting like a crazed, sun-drenched marlin that can’t take enough line. And when the lethargic anglers on the boat’s stern caught sight of such an oft-discussed yet rarely seen apparition, their collective yawl was enough to alert those half a sea away.
After years of inversion-related banter, yields on the 10-year Treasury fell below two-year yields for the first time since 2007. The yield curve typically inverts because investors feel better about long-term economic prospects than those in the immediate future. Rendering them willing to accept a lower rate of interest to park capital well into the future, or further out on the yield curve.