There has been a lot of bearish sentiment over the last couple of months, with more of a positive trend lately. Put this piece in the positive bucket. The argument in question is from Capital Group, a $1.8 tn manager, who contends that while we are in the late stage of an economic cycle, there should still be a couple years of good earnings growth and returns. The late stage of an economic cycle typically lasts 1-3 years, says Capital Group, and that shouldn’t be any different this time. According to the the firm, “Given that this expansion has been pretty measured, I think we’re expecting that the late stage of the cycle will probably also be quite measured as well … And it doesn’t have to end in a recession”.
FINSUM: We really like that final thought. Everything about this market and economy has been steady for years. A slow and steady end makes sense.
Investors may have gotten excited on Friday. Accommodative language from the Fed has a way of doing that. However, there is no reason to get to exhilarated, as this rally doesn’t seem to have legs. One of the big worries is about the largest group of shareholders in the country—Baby Boomers. Because this generation is retiring, they are likely to sell into any rally as they don’t have time left to wait for a big recovery. Accordingly, any rally will likely lose momentum quickly. As evidence, redemptions over the last four weeks have totaled $164 bn, or more than 1% of money in all stock and bond funds.
FINSUM: This is an interesting argument and one we tend to take seriously given the size of the Baby Boomer population and their large shareholdings. That said, we do not think it is large enough to affect the fundamentals of the market, just alter the amplitude.
One of the most well-known finance professors in the nation, Jeremy Siegel of Wharton, says that the market looks sets for a great stretch. The catch is in order for that great run to happen, we need to avoid a recession. According to Professor Siegel, “My feeling is that the market is virtually positioned for a mild recession, but I just don’t think that it’s going to happen … If we avoid a recession, we’re going to have a really good market”. He continued “I think we swung too positive last summer and now I think we’ve swung too negative”. Siegel believes that if a recession does hit, the market is in for another 5-10% fall.
FINSUM: We would have to agree. This selloff, which has corresponded with great earnings in 2018, is basically a recession already being priced in (maybe not quite), so if the recession never comes, at some point there is going to be an “all clear” rally.
Some investors may be breathing a sigh of relief this week alongside the huge rally. The massive gain of 5% earlier this week was the biggest single day gain since 2009. However, taking a broader view, such major gains have usually mean the market is in deep trouble. To give some context, every comparable rally in stocks since 1900 occurred during the bear market of 2008-2009. Overall, it was the 9th time the market reversed an intraday move of at least 1 percent this quarter. That is the most since the US downgrade in 2011.
FINSUM: In itself, we think the rally means precisely nothing for markets. Investors’ emotions are whipsawing all over the place and the market is yet to find solid footing behind any positive narrative.
Emerging markets have had a rough year, with a bear market taking hold. An “all clear” or false bottom has been called a number of times, which means investors need to be very wary of piling in. That said, an interesting signal is showing that emerging markets may be in for a turnaround. London-based Ashmore plc is a major asset manager focused on emerging markets, managing $76 bn in the asset class. Their shares are a bellwether for where EM assets may be headed. And lately, Ashmore has been doing very well. The shares are still down for the year, but rose for eight straight days through Wednesday, their longest winning streak since February.
FINSUM: This could be a sign that the tide is turning. As further evidence, the gains seen in Ashmore shares were not experienced by other asset managers, showing there is a clear differentiation.