I was ‘ambushed’ on a plane on Saturday by a pleasant enough bloke who wanted to know what I expected would happen to stocks in coming months. And like many people who put me on the spot, he wanted to hear my view and hoped I’d agree with what he thought. And he was keen to let me know all about his expectations for stocks.
He was in the “we could revisit the December lows” camp, which I’m not so sure about. Certainly I do have experts who appear on my TV show, who think the US stock market, after its recent rebound after slumping close to 20% on the S&P 500 index, could retest the December lows. But, as I say, I have my doubts.
You see, there were two big drivers of Wall Street’s sell off from October to December. The chart below clearly shows it.
The low was December 24 and it dropped to 2351.1. The serious dropping of the index was linked to a huge news item that Google helped me out with, in confirming what my grey matter had actually remembered. Let me share with you the news of October 17 from CNBC: “Fed points to more rate hikes amid criticism from Trump”.
But wait, there was more: “Fed indicates it’s staying the course on rate hikes despite growing criticism from Trump.” Yep, Donald Trump’s appointed Fed Chairman was so concerned about the strength of the US economy that despite four rate rises in 2018 and protests from his Commander and Chief, Jerome Powell was prepared to warn the market that more rate rises were in store for 2019.
In June 2018, The Financial Times told their readers and effectively markets that the Fed was lining up for four rate rises in 2018 and three in 2019! So the market was ready for rate rises but some economic readings were telling some market pros and even the President that the Fed better be careful.
Powell’s Bolshy-on-rates attitude turbo charged the sell off and guess what news event coincided with the start of the market rebound?
- Well, first it was the December hike in the Fed Funds Rate, which was expected, but it came with the central bank officials implying the three rate rises for 2019 will become two. And at the same time, GDP was seen as rising by 3% for the full year of 2018, down one-tenth of a percentage point from September, and 2.3% for 2019, a 0.2% point reduction.
- But wait there was more! This was the clincher that really sparked the rebound and it was Jay Powell using the word “patience” when it came to the Fed and rate rises across 2019. Between December 18 and December 24, the Dow dropped 1,888 points or 7.9%. And do you reckon Donald Trump had some communiques with one J. Powell?
- On December 19, CNBC reported that “Fed chair Jerome Powell [said] inflation levels give committee patience…” but this didn’t convince the market. Then the New York Fed President, John Williams went on business TV and made it clear that the Fed would be showing patience when it comes to rate rises in 2019 and, by December 24, the market believed it and an 11% rebound happened for the S&P 500 index.
- Now this leaves the US stock market at a much better value then when it was around 2700 before the sell off started in October. This is one reason why I’m not in the December lows camp.
- Also there’s been a bit of Donald Trump and the trade deal talks being positive in this rebound for stocks. Just as the sell off coincided with Fed rate rise talk, it also was powered down by negative Trump trade tweets. However, over January, and with the end-of-February deadline for a trade deal to be struck, we started to see more positive tweets from the President about “progress” when it came to trade negotiations. And these positive progress reports gave the stock market a real lift.
This headline on January 31 from Aljazeera.com really excited the US stock market: “US, China hail talks progress as Trump touts Xi meeting..”
Connected to these terrific trade tidings was a 3.6% rise in stocks.
Interestingly, on January 24, we woke to this headline: “Wilbur Ross: US, China ‘miles and miles’ apart on trade talks” and two days of falls followed. The US stock market is Trump trade sensitive and it’s why I think a trade deal between now and March could result in another leg up for stocks. Of course if no deal is struck by March and talk turns very negative, then the “December lows” brigade may well be on the money.
I have advanced the theory that Donald Trump doesn’t want a recession and stock market crash on his watch before next year’s re-election poll in November. He now faces a slowing US economy and a slowing global economy.
His trade plays haven’t helped China and its slowdown and that has repercussions on the global economy. The S&P 500 group of companies now draw 40% of their revenues from the world economy so a full scale trade war is not in anyone’s interest and that logic could not have escaped the US President.
We know both the US and global economies are expected to be slower in 2019 than was predicted say six months ago so things are delicately poised. But US profits are doing OK, albeit they are sliding.
This was AMP Capital’s Shane Oliver’s take on US reporting season so far: “The US December quarter earnings reporting season has been stronger than expected but it’s not as good as previous quarters as the tax boost and underlying earnings growth has slowed.
“333 S&P 500 companies have now reported, with 72% beating on earnings with an average beat of 3.4% and 59% beating on sales. Earnings growth is running at 18% year on year for the quarter. As can be seen in the next chart, the level of surprises and earnings growth is slowing down. US earnings growth is likely to be around 5% this year.”
This news is another reason why I can’t see a big slump to a December low unless a black swan event comes out of nowhere! However, a lesser pullback is still possible.
Shane Oliver again: “Our view on global and Australian share markets hasn’t changed. They have run hard and fast since their December lows and some sort of short-term pull back is likely. There are plenty of potential triggers for a pullback, including ongoing trade uncertainty (both between the US and China but also with Trump still threatening auto tariffs on the EU), a risk of a resumption of the shutdown in the US and ongoing soft economic data globally – most notably in Europe over the last week. And Australian shares look to have run too far too fast – economic growth looks to be slowing and while we expect the RBA to cut rates, it’s probably still a way off.”
Any drops, on my calculations, will be another buying opportunity, which has been a strategy that has worked for us since March 2009.
One day I will change my view but not just yet!