THE RUNNING OF THE BEARS

Lately it seems every day there are more market experts/leaders/gurus coming forward to say we are in a bear market. Some of the same “experts” that were bullish when the DOW was in the 26,000‘s are now bearish in the 23,000‘s. To us this is contradictory to market wisdom.

There are no doubt risks abound, and we all know markets hate uncertainty. Seemingly unsolvable government debt, rising interest rates, unanswered questions about trade, leaders under investigation, and an expectation that growth could slow, have all seemed to create a downward trend in the market. Rallies have been met with selling, lows become lower lows, and as we said, more and more “smart” people become bearish every day. We point out one important fact : this is what capitulation looks like.

We believed the market had already bottomed and we were wrong. But our conviction remains strong that the bottom is near, that there is so much negativity built into the market right now, and that the market will find its strength again. Here are some near-term catalysts that we believe could give us a New Year rally.

The corporate earnings picture is not as bad as expected. We point out that slower growth does not mean no growth. Consumer spending still remains strong, corporate tax cuts should help companies earnings numbers,

Trade negotiations could surprise to the upside. We believe the market is predicting little success with our leaderships negotiation with China. If a deal is made that benefits the U.S., we believe that even a small amount of clarity, that shows that things are moving in the right direction, would be very bullish to the market. We are optimistic this could happen, as the reality is, the rest of the world benefits from a good economy in the U.S. Simply put, it is in China’s best interest to find some resolution, as it will benefit them to have the strong US economic expansion continue for sometime.  After all, currently from both a market perspective and economic perspective, China is in worse shape than the U.S., by far, and the “trade war” with the U.S. is the likely culprit for their declining retail sales and industrial output this month.

Economic data in the U.S. continues to be positive.  We concede that negative consumer sentiment can be a self-fulfilling prophecy and drive a recession.  HOWEVER, we are not seeing this yet, as economic indicators continue to be positive, and do not indicate an impending recession. To name a few:

• Unemployment remains historically low at 3.7%.
• Rising Wages – Personal income was up .5% in October. And DPI (disposable personal income) was up .5%.
• Consumer Spending – Personal Consumption Expenditures (PCE) increased by .6% in October.
• Retail Sales growth in November was up .2%, as expected and Industrial Output was up .6%, beating expectations of .6%.
• Forecasts for earnings growth remains in the mid-single digits, which we argue is sufficient, even though the market trades like we could have negative growth next year.

Interest Rates are still low.  The Fed raised rates yesterday for the 4^th time in 2018, bringing the Fed Funds Rate to 2.5%.  Clearly the market did not like the tone of the comments – including expectations for potentially 2 more hikes in 2019.  Tightening is rarely met with excitement, as why would the market like policy that works contrary to growth.  However, we are willing to go out on a limb and question why people think a 3% neutral rate is high enough to have a material affect on a growing economy, especially given all of the positive attributes of the current expansion.

Lastly, we point out that reportedly we have been experiencing an historic year-end liquidation by hedge funds, due to underperformance, resulting in the selling of trillions of dollars worldwide in equities.  An end to this selling could relieve some downside pressure.

Our (Ed and Amie) belief is still that this is a (albeit painful) correction in a secular bull market. The hard reality is that every expansion and subsequent secular bull market in the United States has contained periods of difficult and confusing downside. We encourage you to stay the course, not worry about short term movements, put your statements aside this month, ENJOY your family and friends over the holidays. In the meantime, trust us to do the heavy lifting and watch economic indicators, consumer and corporate health, and market responses day by day.  We are here for you.  Happy Holidays!

Please reach out to us anytime to discuss this or anything else.

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