The markets had a scintillating day yesterday. The Dow surged almost 400 points. Why? The reason was simple—the market stopped worrying so much about a US trade war with China. The two countries are planning further high level talks on trade and that alleviated the market’s fears. Barron’s proclaimed that “This is what happens when the market’s not worried about trade”, obviously referring to the strength of the economy and earnings. The market was also more optimistic on Turkey.
FINSUM: There does seem to be a lot of upside that has been stifled by geopolitical worries. Perhaps there is a nice run to be had if the US and China can come to an agreement.
There has been a lot of consternation over markets this year, and with good reason. Between a trade war and rising rates, there has been a good deal to be nervous about. But in the last few weeks, something definitely changed, as exemplified by the Dow just recording its best month since January. Worries about the trade war have abated in the last couple of weeks, but the big question is whether recent gains are sustainable.
FINSUM: So on the question of sustainability of gains, big banks like Morgan Stanley, Citi, and Goldman Sachs have indicated this week that they think markets are destined for a near term correction. We aren’t so sure. We are suspicious of how prices have risen, but in this instance we are drawn to the old idea that markets love to climb a wall of worry.
The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.
FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.
Well, the Dow might be about to suffer its longest losing streak in 40 years. The index has lost eight days in a row, and many of them were punishing. Now, if the Dow loses again today, making it nine days in row, it will be the longest streak since 1978. Since 1896, the Dow has only suffered ten losing streaks of nine days or more.
FINSUM: This seems like one of those stats that appears fairly meaningless when it is happening, but in hindsight might seem the start of a bear market/correction or recession.
Bloomberg has just made a bold call—they say the bull market ended yesterday. While stocks dropped sharply, 1.7% for the Dow, which basically eliminates all the progress they had made over the last couple of weeks, it is hard to say that it means the end of the bull market. The reason Bloomberg argues so is that the market has been stuck in a rut for three months, and yesterday, investors digested a dark survey which showed that Americans, on average, expect stocks to be lower 12 months from now, a sharp turnaround in sentiment. One portfolio manager from Stifel Nicolaus summarizes where the market is now, ”Investors have this understanding that equity markets are at lofty levels and we are in a low-return environment, so as the risk-free rate moves higher, even in a gradual manner, that becomes more of a competitive asset class”.
FINSUM: We are not particularly bearish, but do concede that if rates keep moving higher it is going to be hard for equities to do the same.