Market Strategy 2/11/2019

• Even as deadlines loom over talks on trade and “The Wall,” prospects for positive resolution remain compelling given the alternatives.
• China returns from the Lunar New Year holiday with investors focused on the sentiment that Chinese investors bring to the markets.
• With two-thirds of S&P 500 companies having reported Q4 earnings are up over 14% YoY on the back of revenue growth of near 7%.
• Both durable goods orders and the ISM purchasing managers indexes continued to point to strength even as they reflected some slowing.

Investors may need to “keep their eye on the ball” this week as markets day to day reflect progress or lack thereof in talks in Washington and with negotiations with China as deadlines loom for “the wall talks” and “trade talks,” both of which have near-term implications for economies, businesses, workers, and the markets.

There could be opportunity for a pick-up in market drama this week as China’s bourses reopen after the Lunar New Year’s holiday last week and as global investors ponder (once again) rates of economic growth and the progression (actual and projected) of corporate earnings.

Fans of market volatility are likely to seek every opportunity and leave no stone unturned (and leave no sentence or phrase unpondered) to find a catalyst to justify a ramp-up in volatility. For intermediate- to long-term investors—those looking three, seven, ten and more years forward—there could be opportunity as well—to either sit tight or search out “babies that get tossed out with the bathwater” from any pick-up in volatility.

We were reminded last week that there never is an “all clear signal” sounded over the markets. For the more than three and half decades that we’ve “toiled in the markets” keeping things in context has been key to working our way through challenging markets as well as relatively “easy” markets.

After weeks of equity markets seemingly pressing higher by the day stocks stateside and worldwide appeared last week to take at least some time out to consider the many important loose ends stateside and on the global landscape that have yet to find suitable resolution or at least produce further clarity to justify a daily grind higher.

Short-term players, nervous investors, skeptics and bears who had seemed to nearly capitulate at times over the course of the past six weeks appeared to be reunited with an ardor for catalysts that could justify at least some profits near term without choking on their “FOMO” (fear of missing out).

We’ll persist in calling for investors to keep expectations right-sized and avoid getting swayed by either irrational exuberance on upside swings or despondency on downside moves. We’d suggest serious investors maintain a sense of time and place (keep things in context) and eschew both animal spirits, fear and greed (should they surface) as markets “do their thang” in what so far appears to remain a “do over year” where markets ultimately look to “find their way back home” or to revisit those record highs (in our opinion fundamentally justified) reached last year near the end of September.

The bear run that ensued from late September until the third week of December was powered by what has so far shown to have been a flawed premise of imminent recession in the US; by bearish conviction that the Federal Reserve was poised and determined to make a mistake and get aggressive; and expectations that the trade war would turn protracted and irrevocably change the course of the global economy.

The stock rebound from a nasty bottom reached on December 24th last year found its source in stocks hitting their lowest valuations in several years even as economic and corporate fundamentals showed no sign of deterioration (even if evidencing some slowing).

The rebound has seen a real about face or turn in sentiment that has produced returns for US equities from the start of this year through last Friday that are about or better than half of what we expected to see the S&P 500 achieve for all of 2019—all that in just a little more time than a month.

Given the depth, dimension and power of the rally experienced so far we think it’s no surprise to see markets take notice. News items that caught the market’s attention last week included:

• Speed bumps in talks could delay a deal between the US and China from happening before the March 1 deadline set earlier;
• Congressional negotiations in Washington that have become stymied on points of contention that could delay resolution and risk another government shutdown;
• A spate of mixed earnings results;
• Signs of economic slowing stateside not yet abating;
• A downgrade of growth expectations for Europe.

Its seems reasonable that these sorts of headline items could cause a pause in what has been a most welcome rebound from last year’s “madness to the dark side” in the fourth quarter.

With prospects of a deal between the US and China remaining probable sooner rather than later (if not imminent) and with hope that stateside politicos can arrive at some kind of a deal in Washington to avoid another shutdown that causes pain in communities across the United States we maintain an optimistic view in consideration of the challenges at hand.

We remain positive in our outlook for stocks this year with interest rates, commodities and wages keeping inflation in check and innovation causing disruptions that seed opportunities across many regions around the world.