@theMarket: New Wall of Worry for Markets
Donald Trump's decision this week to kill Iran's second-most important figure, Gen. Qassem Soleimanai, this week placed a time-out on the stock market's bull run into the New Year. Do you run for the hills or do you buy the dip?
If I look back to other geopolitical events, my first reaction is to use any further declines as an opportunity to increase exposure to the stock markets. At the same time, I wouldn't chase those categories of assets that have vaulted higher in response to this event. Gold and oil both moved higher overnight, but those gains could be fleeting as investors begin to assess whether or not there will be any further downside.
That is not to say that dropping a bomb on the architect of many of America's greatest problems in the Middle East will go unanswered by the Iranian government. How and when the Iranians respond should keep all the markets on edge in the near future. And therein lies the problem.
In my opinion, the best of all possible outcomes is for the Iranians to respond quickly, maybe this weekend or next week. That would give our side the greatest chance of thwarting such a move because we would be on high alert. As time passes, however, human behavior is such that gradually we would begin to let down our guard.
In the same way, investors will be cautious at first, but as time goes by without a response, it will be back to business as usual. Until it isn't. And while geopolitical events are always a risk when investing, the high valuations that presently exist throughout the markets could set us up for s a significant fall. Of course, it depends on what and how successful the Iranian response is.
Clearly, from a number of indicators such as momentum, sentiment and in some cases, extreme valuations, stocks are due for a pullback. This week's US Advisor Sentiment report indicates extreme overbought conditions right now. The bull/bear spread expanded to 41.1 percent from 40.4 percent. In the past, differences above 30 percent signal concerns and those over 40 percent indicate investors should begin to take defensive action.
For many of us, the spectacular gains we have enjoyed in 2019 set us up for disappointment this year. Like everyone, I would love to see this bull market continue. I am as greedy as the next guy, but I have been in this game long enough to know that rarely happens. And while the majority of strategists and analysts are uber-bullish right now about the prospects for stocks this year, that could change at the first hint of adversity.
As such, don't get your hopes up too high right now. What you wish for the most (more upside), would simply set us up for a nasty decline when we least expect it. Prepare, instead, for some volatility. Expect stocks to decline, likely sooner than later, possibly even before this month is out. And if it were to occur, whether because of Iran, a snag in the Phase One trade deal, or something else, be glad, be happy, because it could set us up for further gains in the months ahead.
@theMarket: Will This Year Be Like the Last One for Stocks?
It is that time of the year when fortune telling becomes a popular past time in the financial markets. Every Wall Street strategist releases their projections for the economy, the markets, and earnings for the New Year. What strikes me about 2020's crop of predictions is their similarity.
My own informal survey of analyst's forecasts seems to converge around a 1.8 percent-2.0 percent prediction for economic growth in the U.S. Earnings, for the most part, hover around the unchanged mark, or slightly better. These professional forecasters are looking for no more than average gains in the rate of return (ROR) for stocks based on the equity benchmark index, the S&P 500. What does that mean to me?
On average, over the past 150 years or so, the S&P 500 Index has returned roughly 4-5 percent. If you add in dividends, that ROR increases to 6-7 percent. You can read these consensus forecasts in one of two ways. They could mean that none of these people, who are paid to forecast, really know what the stock market is going to do next year, so they are hiding behind an average return. If they are wrong, they can always point to the fact that, from a historical perspective, the markets should have at least provided that much in gains.
The second possibility is that all of these high-paid Wall Street pundits actually believe their forecasts, in which case, as a contrarian, I worry that with everyone leaning to one side of the boat there is a chance that the markets will do something quite unexpected. If that is the case, you have to ask "Will stocks perform better, or worse, than the average?"
Ask yourself what could go right (or wrong) for the economy and therefore the markets in 2020. First of all, we are entering a new decade. The last one was wonderful for stocks. The chances of a repeat performance in the Twenty-Twenties could happen, but I doubt it. Physics would tell you what goes up, must come down, but who says it has to happen next year?
For me, the largest risk out there in 2020 is a spike in inflation. This year, wage growth finally exceeded the inflation rate. It took the entire decade to get there, plus trillions of dollars of global central bank monetary stimulus. That stimulus is still going on and, according to all these strategists, should continue into next year on a worldwide basis.
If I accept that the U.S. economy will continue to muddle through, and unemployment will continue to remain at record lows, one could expect wage growth to gain even greater momentum. And wage growth, my dear reader, is the main engine of inflation in this country.
In addition, we could actually see economic growth higher than what the economists are predicting, because it is an election year. No one can predict what politicians will do, or who will win an election this early in the political cycle. Yet, the market's performance will depend on not only who wins, but prior to that, who is perceived to be winning.
However, I can confidently predict that neither political party will be willing to reduce government spending in 2020. In fact, the opposite almost always occurs during a presidential election year. We are already witnessing both parties "coming together" to pass a flurry of legislation (including a spending bill) at the end of this year. I expect to see more of that in 2020. More spending should equal more growth, more growth means higher wages, etc.
Then there is the Trump trade war. Everyone seems to be predicting more of the same: tariffs will remain, Trump will continue to use trade to get what he wants, and. as a result, business confidence and investment will remain subdued, thus the "muddle through" economic forecast. What might happen if the president switches tactics?
Donald Trump has two things going for him when it comes to voter sentiment. Even those who hate him believe he has done a good job on the economy and the stock market. The only thing that has held back even stronger growth, people believe, is his trade wars. If he were to change his tactics, shelve the trade war for nine months, and work to expand the economy through government spending, then what?
The economy may grow faster than expected. Global growth could get a boost. Emerging markets might benefit, as would other overseas markets. As a result, Trump would probably win in November, because no matter what Americans say, they tend to vote with their pocketbooks.
Stronger economic growth, both here and abroad, a historically low unemployment rate, and the inability (thanks to Trump's immigration policies) by companies to hire the skilled labor they need, would mean more wage hikes. That would translate into higher consumer spending, higher prices for goods and services, and maybe, just maybe, the inflation cycle begins.
In my next column I will pursue this line of thought and provide some other scenarios that could play out in the New Year. Until then, have a most wonderful New Year.
@theMarket: Market Melt-Up
Officially, the Santa Claus rally has not even begun. And yet, almost every day over the last two weeks stocks have climbed higher. Unlike last year, there appears to be nothing stopping the market from continuing to make new highs at least into January.
Historically, the Santa rally begins on the day after Christmas and stretches through to the second day of January. The fact that last year he failed to make an appearance might mean that the jolly old elf could be making up for lost time by coming in early.
The markets action is especially impressive since this is the time of the year when investors usually sell their losers in order to establish a tax loss for the year. Large institutional investors and mutual funds do the same thing. But that selling pressure has been met with buyers, which is supporting the market.
There are two recent trends that are keeping things bullish. The first is the Phase One trade deal breakthrough. Despite its lack of substance, it does reduce some of the uncertainty in the markets even though the final deal has yet to be signed.
The second, and more important development, is the Federal Reserve Bank's injection of over $425 billion into what is called the "repo market." It is the market that provides critical short-term funding for banks in need of cash to settle certain end of year obligations in their day-to-day business. The Fed actually provides cash to financial institutions in exchange for some of their U.S. Treasury bond holdings.
Although the Fed won't say it, what they are doing is a form of quantitative easing or "QE" that reduces the cost of borrowing money as effectively as if they cut interest rates. In the past, the Fed has used QE in order to stimulate the economy. And every time the Fed eases monetary policy, the stock market responds positively.
On Monday alone, the New York Fed increased the amount of its bond buying by $86 billion. We could see a like amount on Dec. 30 through Jan. 1, 2020, according to Fed watchers. When all is said and done, the month of December central bank monetary stimulus could total $500 million. That is not chump change.
And before we forget, there is also the "January effect" just around the corner. Historically, January is the best performing month of the year. That's when folks on Wall Street usually receives their bonuses, and a lot of that money goes right into the stock market. In addition to the bonus play, a lot of those stocks I mentioned that are sold about now for tax losses are repurchased in January, especially in the small cap arena.
The likely results of all these beneficial trends this month and next should provide pretty good support for stocks. I would like to see a bit of a pullback in stocks (30-50 points on the S&P 500 Index) between now and Christmas, however, just to relieve some of the overbought conditions. That could set us up for a sprint to the upside in the markets after Christmas through the end of the year.
There are some investors who raised cash a few weeks ago, betting that Trump would not sign a trade deal, more tariffs would be introduced on Dec. 15 and the markets would plunge. That was the wrong move. Now, they are waiting for a pullback to get back in.
Of course, markets usually do what is most inconvenient for the greatest number of investors, so we could conceivably just grind higher and higher forcing those on the sidelines to capitulate and buy back in.
You don't have that problem, readers, because you have been following my advice and remaining fully invested. That had paid off nicely. In my next column, I plan to throw the bones, (as I do every year), and see how 2020 will shapes up, so don't miss it.
In the meantime, have a Merry Christmas, Happy Hanukkah and for those who can, spend it with your families and loved ones.
@theMarket: The 'Apprentice' Manages the Markets
Where to begin? The China trade deal, the UK elections, the impeachment of the president? Let's not forget the agreement on a new North American trade deal as well. It was a heck of a week and Donald Trump flawlessly controlled the news flow.
Boris Johnson, the Conservative Party leader and prime minister of England, won the greatest majority since Margaret Thatcher on Thursday evening. That is good news for the United Kingdom. His victory also supercharges hopes that a Brexit deal can finally be accomplished in 2020. The British pound skyrocketed over 3 percent on the news, and the London stock market was up 2 percent as well. Good news.
The replacement for NAFTA, called the United States-Mexico-Canada Agreement, or USMCA, is also moving forward after over a year of negotiations between the Democrats and the White House. Environmental issues and U.S. safeguards concerning our labor force that worried the Democrats seemed to have been ironed out. Another good news development.
The next step will be for the Trump administration to submit ratifying legislation to Congress, so the new trade deal can finally be passed into law. After all the claims that NAFTA was the worst deal of the century by the president, the new deal is substantially the same as the old one. It may mean 50,000-75,000 additional jobs for the American auto sector over time, and some of our dairy producers will have a little more access to Canada. Overall, the deal, while positive, is simply another example of smoke and mirrors but should play well for both sides in the 2020 election campaign.
But the real news occurred simultaneously — the impeachment vote of the president and the on-again, off-again China trade deal. Announcements of both events occurred on Friday morning, almost at identical times. The Democratic-controlled House Judiciary Committee voted to proceed with the impeachment of President Donald Trump. He is only the third president in the history of our nation to be impeached. It was no accident that the House Judiciary Panel's vote was delayed until Friday morning when prime time television viewers were at their highest.
But the Apprentice was working behind the scenes. On Thursday afternoon, when the impeachment hearings at the House Judiciary Committee had reached a crescendo, Trump and his men met to ostensibly decide on whether to implement a new round of tariffs in the China trade war this weekend. Shortly thereafter, Trump once again announced (he did the same thing nine weeks ago) that a deal had been agreed to by both China and the U.S. The stock market exploded on the news and finished the day a percent higher. The event was pure theater.
Trump's strategy on Thursday, in my opinion, was to pre-empt the Judiciary Committee's televised vote on impeachment and switch the news focus back to him and to a trade deal, no matter how meaningless. But the Dems outsmarted him. They postponed the vote until Friday morning.
Wall Street (and the nation) has been snookered too many times by Trump and his tweets of misinformation and "fake" announcements on the trade deal to take anything at face value. At this point, Trump's words carry no weight, other than as a reason to move stocks up or down for a few hours. On Friday, investors were going to wait and see. There is no deal, they reasoned, until the Chinese agree, and the papers are signed.
Friday morning, the Chinese Ministry of Commerce in a press conference in Beijing, announced that there was a deal from their side. Trump confirmed the agreement a few minutes later in a tweet. Both sides said the U.S. would be rolling back the tariffs already in place over a period of time. The tariffs scheduled for Dec. 15 would also be canceled.
Investors were so busy following the trade news that hardly anyone noticed the House vote. Mission accomplished as far as the president was concerned. While the announcement is good news from a business sentiment point of view, the actual details will likely have little impact on the economy or earnings. The U.S. will still keep 25 percent tariffs on some imports and 7.5 percent on others. It does, however, give Trump another "victory" to run on in his 2020 campaign.
As for the markets, the final announcement proved to be less than bullish for the markets. Most investors saw right through the Phase One deal. As a result, markets reacted with a typical "sell on the news" event. By mid-day Friday, the markets were all down modestly. And so goes another day in this market. I still believe that we will continue to move higher into the New Year. Next year, however, may be another story.
@theMarket: Markets Broken Record
As the Dec. 15 deadline approaches, investors aren't sure whether the next tranche of tariffs on Chinese imports will be raised, lowered, or delayed. Given the importance of this event, markets are once again stuck betwixt and between.
If this sounds like a broken record on the China trade deal, you would be right. We have been here so many times before that just about everyone in the worldwide financial community is sick of it. Nonetheless, hope springs eternal, or so it would seem, because, many investors still have faith that there will be a breakthrough sometime in the next three weeks.
A senior executive of the U.S. Chamber of Commerce, Myron Brilliant, who is head of international affairs for the chamber, isn't holding out much hope. The Chinese, he believes, are adamant that all tariffs must be rolled back before a deal can be struck, while the U.S. is just as insistent that won't happen. At this point, President Trump is now threatening to increase tariffs again if the Chinese won't relent.
In addition, it's a bad time for making trade deal decisions. The president is not a happy camper at the moment and everyone in and out of the White House knows by now that emotions play a large part of his decision-making processes. The two-week long televised hearings on the impeachment inquiry, the almost-certainty that the House will vote for impeachment, and the likelihood that this circus will continue into the New Year (before it is defeated by the Republican-controlled Senate) is not, in my opinion, going to lighten his mood.
And yet the war of words continues. Friday, President Xi Jinping of China, while greeting some international visitors, including Henry Kissinger, in Beijing, said he wants to come to a phase one agreement as long as the deal is on the basis of mutual respect and equality. The markets immediately moved higher after three days of losses.
While that cheered markets for a short time, the facts are that Xi has been saying the same thing for weeks. Note the words "respect," which is short for "stop bashing us, our companies, and our handling of the Hong Kong riots, Mr. President." "Equality" to the Chinese means "the U.S. must rollback its tariffs in exchange for a phase one deal." To me, there is nothing new here, just the same old song with a slightly different beat than last week.
As I wrote last in my last column, I have been expecting some congestion in the markets. The China trade charade is simply the excuse. We are overbought and extended, so a little pullback would be a good thing. This week the profit-taking has been minuscule, with the S&P 500 Index down less than 1 percent from the highs. That doesn't mean it won't correct further, but if the majority of market participants are expecting stocks to go one way, the chances are they will go the other way.
Let's give things another week or two to shake out before we start looking for that traditional end-of-year rally. Some might say that Santa Claus has already come to Wall Street, filling our stockings with capital gains from all these double-digit returns this year. With the Fed on hold, the economy still growing (even though the rate of growth is slowing), and most analysts and economists optimistic about next year, you could see further gains in the weeks ahead, unless Trump becomes the Grinch that stole Christmas.