January 2, 2019
The 2018 holiday season for investors has been anything but joyful, and just turning the calendar a page into 2019 doesn’t do anything meaningful to resolve the recent efforts by market participants to reduce their exposure to risk. Market anxiety is running high as upheaval led by macro events has had the upper hand against fundamentally sound micro events (economic data), of which most of us are keenly aware.
Nevertheless, the belief that the market had become deeply oversold, in conjunction with rebounding oil prices, strong holiday sales, and some short covering, helped drive the S&P 500 to its best one-day gain (+5.0%) since March 2009 last Wednesday. The following day was actually more impressive, as the reemergence of a buy-the-dip mentality carried stocks from steep losses to notable gains last Thursday.
Many attributed the reversal Thursday to pension-fund rebalancing activity, but short-covering and a rush of speculative buying interest likely played a big contributing role in turning things around in such a hurry. Since so much of today’s volatility is attributed to algorithmic program-trading off of technical levels, some chart analysis is appropriate, since we are all subject to its influence on market price swings.
By all accounts, the S&P 500 held critical support at 2,350 and can continue its snap-back rally (on no news momentum) by another 4.6% to 2,600, where there is a wall of overhead technical resistance. The 5-year chart (below), which I’ve been highlighting the past few weeks, lays out a clear situation for those wondering what levels are important to retake in order to restore confidence that the bull market is alive.
This chart should give investors hope that, despite the deep correction that shaved 20% off the S&P from its all-time high of 2,940 in early October, and the widespread proclamation that “we are now in a bear market,” the long-term uptrend is still intact until broken. Numbers don’t lie, and neither do the charts.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Without a doubt, those who got caught with too much “alpha” in their portfolios in late September may now be looking to rebalance risk if the S&P can achieve this short-term objective of 2,600 over the near term. And there is a good shot it will, within the next two weeks, with the scheduling of a U.S. delegation flying to China to talk trade the week of January 7. In lieu of potentially strong economic data, held back by the federal government shutdown, we’ll see the first wave of fourth-quarter earnings by January 15.
The coming earnings season, along with forward guidance, will be more important than any season I can remember. Currently, fourth-quarter estimated earnings for S&P 500 stocks are expected to climb by 12.4%, according to FactSet. Although that would mark a moderation from a stellar third quarter, it would still represent the fifth straight quarter of double-digit growth in corporate America’s bottom line.
However, because of the assumed slower growth rate of earnings (vs. last quarter), due to the diminishing effects of last year’s tax cuts, the focus will shift away from the bottom line to top-line growth, which will be watched for signs for strength in underlying demand. In 2018 U.S. imports accounted for about 14.7% of GDP while U.S. exports accounted for about 12.5% of GDP (source: www.statistica.com). With China and Europe definitely showing signs of slowing economic growth, how much of that combined 27.2% of GDP will be affected is a big unknown and a large area of concern for current investor sentiment.
Against this backdrop, trade talks and earnings reports may be enough to hoist the market back up to where it broke down – at around 2,600 for the S&P 500. From there, the climb back to 2,750 where the S&P’s 200-day moving average lies overhead, is another story. For the S&P to regain this technical threshold and resume its long-term upside bias, a lot of things have to go right – and this is where everyone that reads the charts would say the big challenge for this nearly-10-year bull market truly lies.
Reality Check for the Reality Show President
As fast as the stock market fell into deep trouble, so has the once-lofty Trump agenda fallen into limbo. The loss of General Kelly as Chief of Staff and General James Mattis as Defense Secretary was not good, in my view, as it sends a message that fewer steady hands are on the wheel of the Oval Office decision-making process. It is very important from a market optics viewpoint that Trump put in place supportive, yet strong and independent-minded replacements in those and other key positions.
Rest assured that when the Democrats take control of the House of Representatives, fresh headwinds will face President Trump. Aside from the remote possibility of a bipartisan infrastructure bill getting passed, it is highly likely that impeachment proceedings will be announced, along with the Mueller investigation finally ending, and the likelihood that trade talks with China will produce no tangible results. Any one or more of these events could neuter the President in moving forward on any of his further initiatives.
Good, bad, or indifferent – as to how these and other political scenarios play out – these unknowns are a net negative for market sentiment, as I see it. Mr. Trump is entering a more tenuous phase of his first term and he would be well advised to stop lashing out in his usual style of character assassination, which may have seemed previously effective. If he wants to “feel the market,” he could close his Twitter account, watch the Dow soar another 1,000 points, and speak more through his press secretary, Sarah Sanders.
Current stock market sentiment is akin to a frayed sciatica nerve, where every Tweet from Trump is like a sharp iron prod to the damaged nerve endings. Trump needs, for lack of a better word, to become more Presidential now. But I’m afraid he loves the “lights, action, camera,” and the resulting antagonism to a fault, which could be his undoing at some point. Even some of his most ardent supporters are worn out by the daily dose of reactionary “Donnie Tweets,” where the bark seems much bigger than the bite lately.
Anyone who has ever had sciatica nerve damage will testify that their spine doctor has recommended sedentary activity, not deep-tissue massage or any other progressive form of physical therapy. The remedy is rest, so the nerves can calm down. As basic of an analogy as this might be, I find it relevant. Taking a sabbatical from slinging arrows and lobbing grenades would do much for stabilizing the market.