If you are keeping an eye on financial stocks, this morning held a very bad omen. Citigroup was the first big Wall Street bank to report earnings, and the numbers weren’t pretty. In particular, the ever important area of fixed income trading revenue was disappointing, with total revenue dropping 21% to the lowest in seven years. The company missed its full-year profitability target by a wide margin.
FINSUM: The reason this is so worrying is that the fourth quarter was a very volatile period for markets. Such environments usually send trading revenue surging for banks.
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.
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.
So where is the market headed next? That is the question on every investor’s mind. Guggenheim Partners’ CIO has just made a bold call. His answer—much higher. He argues that stocks are strong and increasingly cheap, which will spark a rally. “Stocks are cheap based on forward multiples and should rally by 15%-20% from here unless policy uncertainty around China and tariffs remains in place”. He continued, saying “I think we’re going through a classic seasonal adjustment”, but that it is paving the way for a move higher.
FINSUM: We think that once the panic passes, which it may have this weekend, investors will realize that stocks are less expensive than before Trump was elected and the economy is going strongly.
For the most part, President Trump has been seen as quite positive for markets. The big rally in his first year cemented that idea, and for most of this year, stocks were in good shape. However, here is an interesting fact—equity valuations are now lower than when he took office. As the media puts it, “the Trump Bump is turning into the Trump discount”.
FINSUM: Two thoughts occur here. The first is that a big reason why valuations have fallen is because earnings are so good, and a lot of that has to do with the Republican-led tax package, so it is not fair to turn that into a negative. Secondly, most of the market trouble stems from the trade war, so it is more an isolated case of policy than a broad effect. In fact, what could be better than good share appreciation without a rise in valuations? It is exactly what you are looking for as an investor—something that earns well but doesn’t look increasingly overpriced.