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.
There has been a large segment of money managers and investors that have taken a bullish stance against Treasuries. With rates rising and the economy performing well, it stood to reason that yields would keep on rising. However, after a couple of months of brutal stock volatility and worries over a trade war and growth, investors are finally shedding those bearish short positions. The stance was one of the most popular of the year, but the volume of bearish positions has shrunk by two-thirds since from the record it reached in late September.
FINSUM: The ten-year yield now looks more likely to fall than rise given the longer-term economic outlook and trouble in stocks.
Earlier this week it seemed that the market might finally have a reason to believe the Fed might pause its inexorable march higher in rates. That reason was that inflation had dipped below the Fed’s target. Being just a single occurrence, it was a weak-footed hope. Now, new data shows the American consumer is doing well, as retail sales jumped 0.9% in November. The explanation for the jump is that a drop in gasoline prices helped fuel more retail spending.
FINSUM: Consumers are obviously still feeling comfortable, which will give the Fed a bit of comfort about the stage of the cycle.
The moment many investors have been waiting for (or not, depending on how you look at it) has arrived. Rate hikes finally have a chance to slow after their steady rise over the last couple of years. New inflation data has come in showing weakness. Inflation has now fallen below the Fed’s 2% rate, which means the central bank has cause to pause its rate hikes as the economy looks to be on more fragile footing.
FINSUM: There are two ways to look at this. The first is that it takes some momentum away from the current yield inversion. But on the other hand, it could be an indicator that the economy is headed towards recession.
If financial shares are any indicator of the coming stock market environment, asset prices look set for a long rough patch. According to Morgan Stanley, financial shares are suffering as “The carefree days of rising rates and pristine credit quality could be coming to an end”. The bank’s research team continued, “We cannot ignore the growing risk of a bear credit market next year preceding a recession as well as the negative impact of weaker economic growth”.
FINSUM: Banks stocks are trading like the economy is headed towards a bear market, and we can’t help but think it may not be a bad call.