December 10, 2018
Unfortunately the negative market influences continue to pile up on the negative side of the ledger. As a result, Santa still likes you but he hates your investment portfolio this year. Here is what Santa has hidden behind the doors of the 2018 Investment Portfolio Advent Calendar this year…
1- “I am Tariff Man”
2- Huawei CFO Retreat
3- An exiting John Kelly
4- S&P 500 Death Cross
5- Broken Brexit
7- A Yellow Vest of Paris
8- Robert Mueller Schedules a Press Conference
9- A Border Wall or Government Shutdown
10- Some More Fed Tightening
11- M. Cohen & Affair Hush Money
12- Raiders vs. Niners
13- Global Growth Slowdown
14- A Flat/Inverted Yield Curve
15- Further Credit Deterioration
16- M. Cohen & Trump Tower Moscow
17- Financial Stock Underperformance
18- Another Netflix Holiday Special
19- Falling Home Sales
20- Bitcoin Liquidations
22- An Oil Bear Market
23- A Volatility Index > 20
24 – 2019 Profit Margin Uncertainty
25- A Stocking Full of GE, DB & GM
Gee, Thanks Santa. You were so nice to investors for eight of the last nine Decembers. This must be the mean reverting month of December. So much more to think about in the last two weeks. U.S. job growth is clearly pulling up from its torrid pace. Global growth continues to slow maybe taking non-tariff prices with it. This slowing combined with the pullback in risk and the financial markets could give the Fed a reason to wait even longer for more data. A rate hike still seems certain for December, but now the odds for hikes in 2019 are pulling in rapidly. Equity valuations are falling but we will likely need to revise forward earnings estimates even further given some of the recent reads from the auto companies, the home builders and BASF who hit us late Friday. Credit is still breaking down as investors flock to buy Treasuries. In the short term, Equities will still be challenged as earnings get cut and credit spreads widen. Cash is still an investors best friend while we look to make money on both the long and short side of the portfolio. Stay defensive and be careful of the big guy in the red suit bearing gifts.
Okay, who yelled fire in the Bank Loan movie theater last week? Actually, as you can see below, the downward pressure had been building since Junk Bonds rolled over hard in October (see HYG and JNK charts below). Bank loans are less liquid assets so when redemptions hit their liquid vehicles (ETFs and Mutual Funds), prices can break. Just like they did last week. If this continues, banking stocks (which are now in a bear market) will continue lower because they are basically an entire portfolio of bank loans.
@Schuldensuehner: Ahead of the last 9 recessions the yield curve has inverted every time. As such, if you still trust it as an indicator you may feel that more risk premium should be attached to credit and equities at these levels where the curve is a small accident away from inverting, DB says.
@G_krupins: $SPX going back 20 years. Red circles when 50 day crossed below flattish 200 day. Not a bullish sign obviously. We’ll see how it plays out
Records were made to be broken. December’s stock performance could easily eclipse October’s -6.9% return.
Never say Never #2…
Even if I thought this was possible, I don’t think that I would ever go out and say it publicly. Because just as you make the claim, the investment gods are winding up a baseball bat and swinging at a ball with your name on it.
@OddStats: Here’s where we rank so far this year vs $SPX Q4’s since 1923 when the index began.
Toll Brothers didn’t have positive housing news last week…
This surprise late Friday: Earnings pre-announcement from a global major will not bode well for other multinationals…
It doesn’t help that the big ticket international customers are being told not to travel overseas either due to trade war retaliation, yellow vest rioting or now future Brexit shortages.
A risk-off week across the U.S. stock sectors…
Bear market pullbacks in Oil & Gas, Biotech, Semis, Banks and Apple.
Notice how better the returns are in 2018 versus 2008 yet more asset classes have negative returns this year. Also notice the 11 year outperformance of SPY and QQQ over all other assets. I have to believe that some of those worst performing asset classes will be much better performers going forward. I would place some chips on Emerging Market stocks.
Of course global trade wars could shift the landscape if they are negatively impacted and their earnings potential declines.
Foreign stocks have been “cheap relative to the U.S.” for years, but the Normalized P/E gap between the U.S. and foreign developed markets (World Ex-USA Index) has exceeded ten points for the first time ever (26.2x versus 15.6x).
And it should become even more attractive if Morgan Stanley is getting client pushback on it.
The Phoenix market clearly needs an Air Conditioned Scooter rental company right now…
Oscar’s loss. But at least he got a little gold statue named after him.
Finally, we are honored to be recognized by Pensions & Investments as a Best Places to Work in Money Management for the 3rd year in a row.
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