Written by Lance Roberts, Clarity Financial
— this post authored by Doug Kass
I am still carrying a small net long exposure with a plan to short strength in the S&P area of 2750-2775.
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But my forward looking concerns are plentiful – trade wars, the message of the bond market (as well as the message of the bank stock market), rising geopolitical risks (the immigration issue is dividing the EU and splintering some of the entrenched parties) and the possibility of policy mistakes at both the White House and the Federal Reserve as the later pivots away from monetary largesse.
Importantly, the rising ambiguity of global economic growth (and the possible repudiation of the so called synchronized global economic recovery) will likely give investors some pause into the Summer:
The powerful symbol of the yield curve. An excerpt:
You can try to play down a trade war with China. You can brush off the impact of rising oil prices on corporate earnings.
But if you’re in the business of making economic predictions, it has become very difficult to disregard an important signal from the bond market.
The yield curve is perilously close to predicting a recession and so is the absolute level of interest rates – something it has done before with surprising accuracy…
* PMI manufacturing new orders by region are turning lower:
And hastily crafted White House policy (conflated with politics), developed on the back of a napkin and delivered by tweet is dangerous in an interconnected world. Policy developed by hardliners like Navarro and by an inexperienced President that seems at its epicenter the faulty notion that US imports and US GDP are inversely related – when in fact deficits and growth are directly correlated – is likely also to prove dangerous. (President Trump is making economic uncertainty and market volatility great again. #MUVGA)
Finally, as expressed recently, I am constantly shocked how optimistic investors, strategists, analysts and biz news commentators apply first level thinking when considering the wide range of possible political, economic and market outcomes (many of them adverse). But, to me, we are in a vortex of uncertainty and in a new regime of volatility – at a time in which global monetary policy has pivoted from being expansionary to being contractionary and is no longer suppressing volatility. (We will soon see the end of ECB QE by year end, with it being cut in half in three months. That’s a really big deal as liquidity flow becomes a drain both here and over there).
Bottom Line
2017 was a year of hope, in which the S&P Index’s valuation experienced a three handle valuation increase. Wall Street triumphed over Main Street.
2018 is a year of reality, in which the S&P Index’s valuation has and will likely to continue to contract. Main Street is triumphing over Wall Street.
I will grow more cautious as stocks move higher in the near term – as downside risk increasingly dwarfs upside reward.
