“Common sense is genius dressed in its working clothes.” – Ralph Waldo Emerson
Over time, market participants will find that the discipline required to remain committed to a plan in times of volatility is just as important as their initial investment strategy. Compared to last year, markets are relatively more expensive, and that may begin to introduce volatility. While we have turned the page in the calendar, trade issues, impeachment, the election, growth concerns, and geopolitical tensions will more than likely continue to dominate the news stream.
With markets at elevated levels, it is hard to get away from the word “risk”. The stock market is now viewed as being risky. The pundits say the risk/reward is no longer in an investor’s favor. No matter how we look at it, “risk” is complicated. It’s tied to each individual’s perception of what is risky. Since we are all human, one thing is for sure, we don’t deal with it very well. Investors live with the notion that if they have time to prepare for something, it can be dealt with. As mentioned last week, the urge to protect, to be one step ahead of everyone else, is a mindset that is dominant in human nature. These human traits can lead to problems when it comes to managing money.
In reality, the biggest economic risk is the one that no one sees coming. If we aren’t aware of it, we aren’t prepared for it. When it’s not on our radar screens, we can’t be prepared for it. Of course, when no one is ready for it, the damage is more severe. When an individual embarks on the process of managing their money, they MUST accept that as FACT. There is NO way to prepare for the unknown.
It’s part of human nature to conjure up the notions of a quick violent market drop when stock prices are elevated. The infamous Black Monday in 1987 where the DJIA dropped 22% in one day is among the favorite events that are cited when someone wants to tell us to get prepared. That event was 33 years ago and I don’t recall another 22% one-day drop in the markets since then. The reason for that is because it hasn’t happened since, and it never occurred before that day in the 122 years the DJIA has been in existence. Yet to this day, some people believe we HAVE to be on the lookout for that type of event.
If an investor is going to lament and change strategy over a “black swan” event, they aren’t accepting a common-sense principle, and they need to remove themselves from the investment scene. They are doomed before they start.
In contrast, the “risk” many see and perceive as problems usually have little to no impact on the markets. However, the urge to “prepare” is so strong it overwhelms everything else. In the last couple of years, it is obvious what was on the minds of the investment community.
When I look around at the various stock market outlooks that were assembled for 2020, just about all cite the trade war and the election. Last year it was impeachment and the trade war. In 2018 it was interest rate hikes and the trade war. The same drumbeat repeated incessantly for quite some time. While some were constantly getting “prepared”, the stock market as it usually does with these “perceived threats” fooled them.
Avoid the urge to make emotionally-driven portfolio decisions, as history suggests that those ill-fated decisions will ultimately lead to sub-par performance.
The 50th annual Davos World Economic Forum was the centerpiece of the week’s events as political and global leaders take credit for everything going right in the world and lecture everyone else about what’s wrong and how they can fix it.
Since October 4th, the S&P has posted gains in 13 of the last 15 weeks. The strength is obvious as the Index has not experienced a 1% daily move in three months. The shortened trading week began with markets on a down note as Asian and European markets traded lower on concerns related to the growing respiratory virus in China ahead of the Chinese New Year. That led to the start of some profit-taking here in the U.S. as well.
With the equity markets in overbought territory, any reason to take profits becomes a good one, and the “Coronavirus” cast a shadow that had investors concerned. Macau announced that all parties and festivities tied to the New Year celebration have been canceled, and the CEO of Wynn Resorts (WYNN) has said that they will not rule out closing its casinos on the island. So investors reacted to the fear found in the headlines.
The S&P 500 traded down 0.90% for the week, while the Dow 30 posted losses in all four trading days, closing 0.61% lower in the shortened trading week. Positive earnings in the Tech sector pushed the Nasdaq Composite to another new high before turning negative on Friday.
Given where the equity markets were trading and adding the worries over the Chinese Virus, price action was fairly impressive. The S&P sits 1% from the all-time highs. Virus or no virus, it would not be a surprise to see more weakness in equity prices. Bears might get their moment in the sun, but in reality, any pullback may very well play into the Secular Bullish trend.
International markets have also been strong, led by a recent breakout in Mexico (EWW). Russia continues outperforming even after its 37% gain last year. Stock Markets in Asia were down sharply this week on concerns that the Coronavirus would ultimately hit tourism and consumer spending activity. The sharp quick losses were very noticeable. China (ASHR) fell 6.6%, Hong Kong (EWH) -5.4%, and Emerging Markets (EEM) -3.4%. Airline and other travel stocks listed on U.S. markets were hit hard as well.
I’ll remind all that the SARS virus event turned out to be a good buying opportunity for anyone that had a time horizon of more than a month.
I remain amazed at how some on Wall Street, corporate CEOs, and the media continue to grumble about how certain indicators are pointing at an imminent recession in the economy. Some of the worries about the economy are connected to the upcoming election. Many also continue to center around the never-ending trade war commentary. We have all certainly heard these warnings before, not just last year, but pretty much ever since the U.S. economy began to emerge from the Great Recession back in 2009-2010.
While it may be the view for some, it is hard to agree with the growing list of economists and CFOs, etc. that are predicting a new recession will begin this year. Many of the folks that are so sure that the economy is about to tank are focusing on what they can see in the rear-view mirror.
I wonder if those waiting for a recession to crash into the economy during the weeks and months ahead are taking time to ponder why jobless claims are still so low.
The latest forecast from GDPNow shows Q4 GDP down to 1.8%.
There has been plenty of discussion on the negative impact of the U.S.-China trade skirmish.
While some still have their doubts, perhaps the stock market realizes the potential positive impact of the “deal”.
U.S. consumer confidence edged up 1.1 points to 113.9 in the week ended January 19, according to the Economic Intelligence report. Both the current conditions and future expectations components posted moderate gains to 113.1 and 114.5 respectively.
December Chicago Fed’s national activity index fell -0.76 points to -0.35, following November’s 1.15 point bounce to 0.41 in November (revised from 0.56). The index was at -0.03 a year ago. The 3-month moving average improved to -0.23 from -0.31 previously (revised from -0.25). 60 of the 85 indicators that make up the index made negative contributions, while 25 made positive contributions. The index has charted a very choppy course over the last couple of years.
Kansas City Fed manufacturing survey composite index was -1 in January, slightly higher than -5 in December and -2 in November. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes.
Conference Board Leading indicator declined -0.3% to 111.2 in December after a revised 0.1% November gain to 111.5 (was 111.6). Note that this month’s report included annual revisions. The index has posted a decline in four of the last five months. In late 2015, early 2016, the index had fallen in four of the six months. Big declines in three of the 10 components contributed to the headline drop.
The IHS Markit Flash U.S. Composite PMI Output Index posted 53.1 in January, up from 52.7 in December, to indicate the quickest rise in output since last March. The increase in output was solid overall despite the pace of growth remaining below the series long-run trend.
Siân Jones, Economist at IHS Markit:
“The recovery of growth momentum across the U.S. private sector continued to quicken at the start of 2020, with overall output rising at the sharpest pace since last March. Nonetheless, the underlying data highlights a manufacturing sector that is not out of the woods yet, with goods producers seeing only modest gains in output and new orders. Service providers also registered a slower upturn in new business, which fed through to softer increases in output charges as part of efforts to attract new customers.”
“On a positive note, private sector firms increased their workforce numbers at a faster rate, with some also expressing frustration at a lack of available candidates to fill vacancies. Job creation reflected stronger optimism regarding future output. Although firms remain wary of the potential for headwinds through 2020, business confidence crept higher for the second month running.”
“Further signs of historically soft price pressures will come as no surprise to the FOMC, who meet next week, adding to expectations of a hold in the policy rate. Muted increases in costs and output charges reportedly stemmed from both producers and suppliers increasing their efforts to boost sales.”
Another good housing report. December’s existing-home sales rebounded 3.6% to 5.54 M, better than expected, after a 1.7% decline to 5.35 M in November. Sales are up from 5.000 M a year ago. Single-family sales bounced 2.7%, with condo/coop sales up 10.7%. The months’ supply of homes dropped to a record low of 3.0 from 3.7. That helped boost the median sales price to $274,500 from $271,300, which is up 7.8% year over year.
Lawrence Yun, NAR’s chief economist:
“Home sales fluctuated a great deal last year. I view 2019 as a neutral year for housing in terms of sales. Home sellers are positioned well, but prospective buyers aren’t as fortunate. Low inventory remains a problem, with first-time buyers affected the most.”
“The median existing-home price for all housing types in December was $274,500, up 7.8% from December 2018 ($254,700), as prices rose in every region. November’s price increase marks 94 straight months of year-over-year gains. Price appreciation has rapidly accelerated, and areas that are relatively unaffordable or declining in affordability are starting to experience slower job growth. The hope is for price appreciation to slow in line with wage growth, which is about 3%.”
IMF forecasts global growth of 3.3% this year, up from the projected 2.9% for 2019 (it’s the first projected acceleration in growth in three years), though it was trimmed from 3.4% in October. The estimates, released earlier this week, show world output at 3.4% for 2021, though that was cut from 3.6% previously. While the Fund sees risks “less skewed” to the downside, reduced trade tensions, signs of bottoming in manufacturing, some “intermittent” good news on U.S.-China relations, an orderly Brexit, along with accommodative monetary policies.
Unemployment across the globe has improved since the financial crisis lows.
ECB leaves rates unchanged. Mario Draghi:
“We expect net purchases to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates”.
The “flash” IHS Markit Eurozone Composite PMI was unchanged at 50.9 in January, signaling a further muted increase in activity across the euro area economy. The rate of expansion has remained broadly stable since the start of the final quarter of 2019, running at the weakest for around six-and-a-half years.
Andrew Harker, Associate Director at IHS Markit:
“While the year may have changed, the performance of the eurozone economy was a familiar one in January. Output growth was unchanged from the modest pace seen in December, signaling that the economy failed again to record a pick-up in growth momentum.”
“The failure of growth to accelerate was in spite of some areas of positivity. The service sector remained in expansion, while the worst of the manufacturing downturn looks to have passed and the industry appears to be moving towards stabilization. France and Germany continued to grow, while business confidence across the single-currency area jumped to a 16-month high.”
ZEW index of Current Situation and Expectations for Germany rose 16.0 points from the previous month to 26.7 in January 2020, the highest since July 2015 and well above market expectations of 15.0. Investors believe the trade dispute’s negative effects on the German economy will be less pronounced than previously thought following the recent signing of the U.S.-China Phase One agreement.
Jibun Bank Flash Japan Composite PMI for January registered 51.1 versus the prior reading at 48.6.
The seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index, which is based on approximately 85% of usual monthly replies, rose to 52.4 in January from 49.3 in December. As a result, the headline index registered above the crucial 50.0 no-change mark for the first time since August 2019.
Chris Williamson, Chief Business Economist at IHS Markit:
“The survey data indicate an encouraging start to 2020 for the UK economy. Output grew at the fastest rate for sixteen months amid rising demand for both manufacturing and services, suggesting business is rebounding after declines seen late last year. Intensifying political and economic uncertainty ahead of the general election has started to ease, encouraging more spending and helping push business expectations of future growth to its highest since mid-2015.”
“The survey is indicative of GDP rising at a quarterly rate of approximately 0.2% in January, representing a welcome revival of growth after the malaise seen in the closing months of 2019. Hiring has also picked up. “The uplift in sentiment about the outlook hints at even better growth to come, but confidence needs to continue to rise to ensure this solid start to the year has legs.”
The 4Q19 earnings season is underway! The consensus forecasts S&P 500 earnings growth to decline ~1% year-over-year, but if earnings beat by historical averages (~3-4%), earnings growth should find its way into positive territory. As a result, an earnings recession (two straight quarters of negative earnings growth) could be avoided.
FactSet Research looks ahead to 2020:
- For Q1, earnings growth of 4.3% and revenue growth of 4.2%.
- For Q2, earnings growth of 6.4% and revenue growth of 4.9%.
- For Q3, earnings growth of 10.1% and revenue growth of 5.7%.
- For Q4, earnings growth of 15.0% and revenue growth of 6.0%.
- For CY 2020, earnings growth of 9.5% and revenue growth of 5.4%.
We can see why it is important that a rebound in the global economy takes shape. International revenues account for about 38% of total U.S. revenues.
The charts illustrate which sectors are more dependent on the international scene.
The Political Scene
U.S.-India draft “mini” trade deal in a pact that could ease some of the U.S.’s longstanding concerns with India’s trade and economic practices, as well as restore India’s preferential trade status.
India would be able to ship billions of dollars of duty-free products to the U.S., and a reduction in tariffs is unlikely on either side.
India’s stock market has now joined the global rally with a 5.5% rally since January 6th.
France has decided to postpone its proposed tech tax until the end of 2020. French President Emmanuel Macron has agreed to postpone until the end of this year a tax that was levied on big tech companies, such as Google (NASDAQ:GOOGL) (GOOGL), Apple (AAPL), Facebook (FB) and Amazon (AMZN), averting a trade war.
Macron reached out to President Trump seeking a way to end the threat of tariffs while they work out a broader accord on digital taxation. As part of the truce, Macron agreed to postpone until the end of 2020 a tax that France levied on big tech companies last year, adding that in return the U.S. will postpone retaliatory tariffs this year.
We are just over a week away from the kick-off of the Democratic primaries. Iowa’s caucuses will be held on February 3rd.
As of now, the nomination odds have former vice president Biden as a favorite on both the national level as well as each of the first states to hold their primaries; New Hampshire (Sanders) is the only exception.
The Senate impeachment trial began this week with the House Democrats presenting their case first. The S&P has gained 12+% since the impeachment inquiry began in the House.
In the last four months, the 10-year Treasury rate rallied off the low of 1.47%, reaching an interim high of 1.94%. The 10-year Treasury has now settled into a trading range, perhaps building a base for a run higher. On the flip side, traders that live in fear of a global recession suggest this is a pause before the bottom (1.47%) is tested again. The 10-year Treasury yield began 2020 above 1.92% and closed this week at 1.70%, an 11-week low, as investors rushed back into bonds over Coronavirus fears.
The three-day 2/10 Treasury Yield Curve inversion that occurred last August is now in the rearview mirror.
The 2-10 spread was 16 basis points at the start of 2019; it stands at 21 basis points today.
Global Fund managers have increased their equity positions, but are also sitting on a lot of cash. Despite the rally to new highs, the latest Bank of America Merrill Lynch (BoAML) fund manager survey for January shows fund manager cash levels remained at 4.2% for the third month in a row. That is the lowest level since March 2013, while allocations to global equities increased 1 percentage point to net 32% overweight, a 17-month high.
Global equity allocation has risen from net 12% underweight to net 32% overweight since August 2019, the biggest jump in equity positioning since 2011, but still below the net 50% overweight level seen in prior market tops, according to BoAML.
The American Association of Individual Investors reported bullish sentiment rose to 45.6% from 41.8% in the prior week – the highest level of bulls since 10/4/18 when it hit 45.6%.
Bearish sentiment declined for the second week to 24.77% from 27.51%. There was a drop in neutral sentiment as well to 29.63% from 30.66% in the prior week. The last time neutral sentiment was below 30% was 1/3/19.
WTI traded at a six-week low on fears that the virus in China is going to slow global travel and eventually slow demand.
According to the weekly inventory report, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.4 million barrels from the previous week. At 428.1 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year.
Total motor gasoline inventories increased by 1.7 million barrels last week and are about 4% above the five-year average for this time of year.
WTI closed trading at $54.28 down $4.41, the lowest levels since October ’19.
The Technical Picture
Overall market breadth remains strong. Not only did the S&P 500’s cumulative A/D line hit a new high this week, but the rate of change has also accelerated to the upside.
The DAILY chart of the S&P 500 continues to tell a positive story. A strong rally that has just tested the first level of support at the 20-day moving average (Green line).
As a matter of fact, until Friday, the 10-day moving average hadn’t been violated on a closing basis since December 5th! Once an index/stock breaks out of a trading range and multiple new highs are set, it becomes difficult to extrapolate how far the rally can go.
The simple fact that the positive technical analysis has remained the same for weeks illustrates how difficult it is to predict when a rally will eventually peter out.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
Individual Stocks and Sectors
Among the major U.S. indices, Energy and Materials are the only two Sector ETFs in the red year to date, while Technology and Communications Services are both already up over 5% for the year. Despite continued calls for value to outperform, growth has been leading the way across all the different market caps, and in every case, growth has gained at least twice as much as value.
One look at the performance of the Utility sector in the last two weeks illustrates investors continue to have a voracious appetite for “safe” investments.
There are bubbles that can be detected in any market. Here is an example of one, and it is a euphoric irrational flight to safety, not risk. Utilities grow at low-single-digit rates, yet sell for multiples that match some of the best technology growth stocks.
Fourteen percent of Americans are illiterate; they can’t read at a 4th-grade level. Two-thirds of the prison population is in the same situation. Among developed nations, the U.S. ranks 16th for adult reading skills.
Yet Politicians are telling us “income inequality” is a problem. Common sense should tell us where the root of the “income” problem lies.
We’re just 17 trading days into the new year, but already it’s a year that is topping year-end targets for some market pundits. A lot of strategists were somewhat conservative heading into the year, but if you’re a Wall Street strategist and already you’re going back to the drawing board this early, it’s going to be a long year.
Bespoke Investment Group notes:
“The average analyst target price for individual stocks in the S&P 500 is just 4.6% above the average actual share price. Going back to at least 2004, there has never been another time where stock prices have been so close to their average analyst price targets. As an analyst, it’s hard to justify a buy rating on a stock if it’s trading at your price target.”
While the market has seen a strong start, the gains have been incredibly stable. The much-anticipated uptick in volatility has yet to surface. Market breadth has been strong with the S&P 500 A/D line and the percentage of stocks hitting new highs expanding, confirming the gains we have seen in the major indices. This isn’t a make-believe market rally. There has been plenty of strength displayed ever since the October 2018 breakout to new highs.
Just as important, the sector that I look to as a leader, the semiconductors, shows no signs of letting up with a new high forged this past week. That move is no fluke. It is being supported by earnings that are quite positive. The economy has been mixed with more good than bad, with Housing and the consumer remaining resilient and leading the way. Inflation pressures are non-existent, and the Fed is out of the picture. The theme for this year was a “confidence” driven economic rebound. Trade-related “issues” are now a tailwind instead of a headwind.
The market sniffed out this change for the better. It anticipated the “positives” that were sitting there like undiscovered gems, and since the October breakout has rallied 10+%. If an investor realized the trade skirmish wasn’t the boogeyman it was being made out to be, then S&P 3,300 isn’t so surprising.
However, the ever-present naysayers have their theories as well. In their view, the trade war with China disrupted some businesses/sectors. Spending and investment have been delayed and manufacturing activity has been contracting. While the recent agreement between the U.S. and China was a much-welcomed backing off of pressures from the trade war, the business community is concerned about the tariffs that are still in place. Furthermore, they view the threat that the second phase trade talks will get tripped up and new tariffs will be implemented by both sides. Combine their tepid outlook while stocks are surging, it’s easy to see why they believe the situation looks frothy and are of the opinion that this is 1999 all over again.
Each can decide which argument may be correct. There are very important differences in the background of today’s equity market versus that period in time. The “bubble” is in the defensive areas of the market today. I’ll add another that just might be the most important difference. The Financials and overall market breadth are making record highs.
With the stock market at highs and everyone concerned about valuation, the question that is being asked today; How can you be Bullish?
Since I look at the equity market from a different perspective than the average analyst, I will break the rules and answer that question with a question. How can you not be Bullish?
A successful investor navigates the markets by acting like an emotionless cold-blooded assassin. They simply push aside any distractions and concentrate on the task at hand.
Stay the course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
The markets are at highs and investors are nervous, they see another “1999 bubble”. The investment world is full of opinions. Who an investor chooses to get their information from will make a HUGE difference.
While it wasn’t very popular, staying “long” equities was the right call in 2019. Turning the page and forging ahead into a new year brings more challenges.
Members of the Savvy Investor Marketplace Service stay grounded and look at ALL of the facts. Simply put, I’ve called this Bull market correctly since inception.
Graduate to the next level, please consider joining a venture that will put you in control.
Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.