Eq: Total Market
Wall Street is getting behind the stock market in a way that is atypical for the current environment. Following a big fall in stocks, banks and analysts usually get shy about calling a rally and generally stay neutral or call for further losses. However, following the best two consecutive trading days since February, they are getting behind stocks with unusual vigor. For instance, JP Morgan’s all-world analyst said that the “rolling bear market” might turn into a “rolling squeeze higher” and that “the potential for a violent upside rally is substantial”.
FINSUM: We are not as optimistic as Wall Street, but certainly don’t feel gloomy about the market given the strength of earnings and the economy.
The market seems to have finally regained its footing after a very turbulent couple of weeks. This selloff felt different than any in recent memory and serious damage to the market’s psyche seems to have been done. But what might it say about the wider economy? The answer is little, according to the Wall Street Journal. The selloff will probably be just that, a market fall. In reality, tech companies, which led the losses, reported very solid earnings, with margins expanding very well. Little can be drawn from the results that might show the economy is in trouble.
FINSUM: The only aspect of this selloff we are somewhat worried about is how it might impact consumer confidence and spending this holiday season. However, so long as the market stays strong this month, we expect the impact to fade.
For many years the prevailing mantra in the equity market had always been “buy the dip”. Every time the market fell, investors bought the dip and encouraged others to do so. However, that approach seems to have disappeared in the carnage of the last couple of weeks. Whereas falls used to be followed by rallies that pushed the market higher, the last few weeks has been characterized by more sustained losses with shallower rallies. Nordea Asset Management’s chief strategist sums up the mood change well, saying “We’ve seen a shift from buying on dips to selling into strength … We’re increasingly moving from glass half full to glass half empty; that’s the narrative here”.
FINSUM: We think that view sums it up well. While we do believe stocks won’t enter a bear market right now because earnings and the economy are solid, we sense that something in investors’ psyches has fundamentally changed.
Is there gain ahead or pain ahead? That is the question on every investors’ mind. Well, Morgan Stanley has an answer. The bank’s chief US equity strategist, Michael Wilson, says that the answer is more pain. The bank thinks we are in a “rolling bear market” and that stocks will reach bear status soon. “We think we get there in four to eight weeks”, says Wilson. The bank defines a bear market as a drop of 20% or more with no recovery for 12 months. “Risk-reward remains unattractive for us”, he added.
FINSUM: Morgan Stanley thinks a lot of these losses come down to the change in central bank policy. We agree with that but we also think investors are just anxious about what lays ahead in terms of a possible recession, trade war, and beyond.
Goldman Sachs thinks this selloff is “overdone” and that a rally is coming. The bank thinks the current market presents a good buying opportunity and forecasts the market to rise 7% before the end of the year. According to the bank “The recent sell-off has priced too sharp of a near-term growth slowdown. We expect continued economic and earnings growth will support a rebound in the S&P 500”. To play the rebound, the bank says to look at stocks in its “high quality” basket. These include: Mastercard, Cognizant Technology Solutions, Alphabet, Accenture, Ansys, C.H. Robinson Worldwide, Edwards Lifesciences, International Flavors & Fragrances, and Ross Stores.
FINSUM: That is a very wide selection of choices, but more interesting to us is Goldman’s view on a recovery. We agree that this selloff seems to be an overreaction relative to the fundamentals.
“We think U.S. growth may have just peaked”, says the chief US economist for Barclays Capital. The US is coming off a strong GDP report, but the reality is that growth fell from 4.2% in the third quarter to 3.5% in third quarter. Most economists say that will slow to 2.5% in the first quarter of 2019, and 2.3% one year from now. In other words, the economy has already seen “as good as it gets” and we are past-peak. Most expect consumer spending and business investment to stall as the benefits of the tax cuts wane, weighing on the economy.
FINSUM: It is hard to imagine the economy getting better than it has been this year. Furthermore, we have a hard time believing it is going to slow down as gradually as the forecasts. We think a more abrupt recession is probably more likely.