Eq: Total Market
There is a lot of doom and gloom out there right now. The stock market is in major pullback mode over a wide range of fears. One of the main ones is the threat of a recession coming next year. A lot of signs, like the inverted yield curve, are pointing towards an economic reversal. However, according to Barron’s, the reality is that a recession is unlikely. Rather, we will likely just return to the post-Crisis norm of slower, steadier growth (think 2.0-2.5%). A couple of factors will weigh on growth, including higher rates and a fading influence of the most recent tax cuts.
FINSUM: A return to normal growth seems about equally likely to us as a recession. No one really knows. A lot of it may come down to how hawkish the Fed is, as the central bank could easily steer the economy into a recession.
Charles Schwab, a major conduit for retail investors’ views of the markets, has just come out very bearish. The broker’s chief investment strategist is full of interesting, and bearish insights for 2019. For instance, she explains that earnings growth estimates are far too high (at 6-8%) and that an earnings recession is likely. Schwab expects a rolling bear, if not a full bear market, to continue. The broker pointed out that nearly 50% of S&P 500 stocks are now already in a bear market (down 20% or more).
FINSUM: It is pretty difficult to find reason to be bullish on shares right now. The economy seems to be past peak, an intractable trade war is growing, and a yield inversion is taking shape. That said, the market loves to climb a wall of worry.
One of the guiding mantras of the markets since at least 2015 has been to buy the dip. The generally idea was that the market was on an upward trend, so every little downturn presented a good buying opportunity. One of the big problems with the markets right now is that such dip-buying has all but evaporated. With a trade war raging and a recession on the horizon, investors have lost faith that the direction of the market is upward, which means each dip now represents additionally downside risk instead of a buying opportunity.
FINSUM: That core belief in the direction of stock prices has been badly shaken and it is hard to imagine it will return any time soon.
The market is in its toughest position in recent memory. Numerous headwinds, none of which are easy to resolve, are stacked against it. Wit that in mind, banks are starting to publish their doom and gloom outlooks for 2019. Nomura has identified a number of “grey swans” (not black) which could topple the market next year. Some of the most interesting risks they identified included a European debt crisis sparked by Italy, oil plunging to $20 per barrel, the end of populism, and an “inflation sonic boom”.
FINSUM: To be honest, we think these are all very unlikely. What is much more likely is a recession accompanied by a trade war.
Just a handful of days ago, the US-China trade situation looked to be improving. Trump and Xi reportedly had a breakthrough meeting and China even went as far as to deliberately make a positive public statement in an effort to prop up US markets. However, things have worsened rapidly. First, the US arrested the CFO of Chinese giant Huawei, which angered Beijing, and now the US is close to issuing a travel warning after China detained a Canadian diplomat. The detention is part of an effort to compel Canada not to extradite the Huawei CFO to the US.
FINSUM: We went from public display of détente to a very tense diplomatic situation. The outlook for the trade war, which will be a reflection of all the other issues, looks bleak at the moment.
The market has been very bearish lately, with last week seeing the worst declines for the S&P 500 since march. The market fell 4.6% last week. This may seem like just another bout of volatility, one in a series we have had this Fall. However, the market’s fear gauge, the VIX, suggests that this selloff is different. The VIX just recently hit levels close to during October’s rout, but what is different this time is that it has sustained its momentum in a way that hasn’t happened since 2016. “This shows that unlike October, investors no longer see the market correction as a temporary dislocation, but rather driven by more persistent macro risks”, says Credit Suisse.
FINSUM: The market is continuing to reflect a comment we made yesterday—that the problems plaguing stocks are not simple to resolve, so is easy to see how prices could continue to fall for some time.