Here We Go Again?

By January 18, 2019 Weekly TGIF

Stocks closed the week on a high note, on the back of increasing optimism of a trade deal with China. The S&P is on track for its 4th consecutive week of gains, something it hasn’t done since last Summer. It’s also up over 5% in January again, which occurred last year. As pointed out in our 2019 Outlook newsletter, in previous years when January was up 5%, the rest of the year ended in the green. That happened 12 out of 12 times… until last year. The streak broke. But here we go again. Stocks have been surging with increased expectations of some sort of a deal. It’s looking more and more likely. That’s the good thing. It’s also setting things up for a “sell the news event.” Whatever deal is inked, we are convinced it will not address spying and theft. That is a multi-year if not multi-decade event. The screws are tightening on this issue with Chinese Tech company Huawei the primary target of spying. Its CFO is still detained in Canada. Another executive was arrested in Poland. Europe has jumped into the ring here too. It has Cold War similarities of mistrust. This is playing the long-game.

On the short-term, a trade deal with China is a material positive. Both Presidents need a deal. For China, it’s an economic deal, not political. President Xi has secured his position for life. This deal targets the tariffs, which are set to rise in March. Nobody wins in a trade war. The Market has made that clear. With the rally, stocks are near-term overbought. It sure feels good and has provided significant relief from the brutal end to 2018. But we still think we are in a cyclical Bear Market, which can have rallies that lull you into thinking the worst is over, then BOOM! Stocks get hit hard and are back in sell-off mode. We aren’t convinced that the lows are in for this cycle, which was hit around Christmas. That said, we’re not convinced that they’re not either. We are convinced however that choppy price action will continue in 2019.

The Global Economy is slowing, as are earnings. The uncertainties around trade, politics and geopolitics remain. Stocks might be cheap. But until we see the E (Earnings), we won’t know the true fair value of the P (Price). And don’t forget about Brexit, which remains one of the biggest unknowns with Prime Minister Theresa May’s deal rejected but her job has been maintained. She won the no-confidence vote but now faces a deadline to set out her Brexit Plan B by Monday. She may be prepared to dissolve some of her red lines to get her opponents onside, like keeping closer ties to the European Union or postponing Britain’s divorce from the EU outright, which is slated for March 29. EU leaders reportedly suggested the possibility of a delayed Brexit until 2020 after Germany and France indicated their willingness to extend withdrawal negotiations because of Britain’s political turmoil. Wow… Kick it down the road? Well, that seems to be the strategy for many complex issues in modern times.

So what’s going to give? British political parties can’t seem to agree on anything. The same can be said for the government shutdown and Washington. The West continues to divide amongst itself. That’s a theme. China and Russia are likely enjoying it. China’s leader on trade will be coming back to Washington to perhaps finalize a deal and put the trade war behind us. The cold war on IP (Intellectual Property) will continue. The allegations of spying and theft by Huawei are gaining momentum. But stocks keep charging higher in the new year. A lot of the damage from December has been remedied, from a Market perspective. It was an overshoot to the downside. But there are still many issues that will likely keep things in check in 2019. We expect the volatility to continue and are increasing our defensive approach off this rally. We still believe there are higher levels ahead for the DOW and S&P this year, but we expect a lot of back and filling throughout the process. That is normal Market behavior. The chase is on right now. We just don’t think it lasts much longer.

Have a nice weekend. The Market will be closed on Monday, in honor of Dr. Martin Luther King, as will our office.

We’ll be back, dark and early on Tuesday.

Mike

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