INVESTORS first read.com – Daily edge before the open deal
S&P 500: 2,775
Tuesday, February 19, 2019 9:13 a.m.
Sept. 21, 2018 : Raise cash to 50% (DJIA: 26,656)
Nov. 8, 2018: Raise cash to 75% (DJIA: 26,180)
Dec. 26, 2018 Doom Thick Enough for a Rally (DJIA: 21,792)
Note: I will be changing my format in coming weeks with brief summaries of key topics up front for a quick read, then details below. I plan to address politics in a weekly blog, or more often depending on unravelling events, under the title of “Folly Sci 20/20.”
We are looking at a panic by institutions as they scoop up stocks of interest before they run away from them. There haven’t been many pullbacks since a 20%, three month correction bottomed out on December 26.
Buyers are paying up for stocks they thought they would have plenty of time to accumulate, even buy at much lower prices.
A policy change by the Fed from one of increasing its fed funds rate (Quantitative Tightening) to a “wait and see” policy in 2019 was the trigger for the panic.
For bears, the message is “outta my way,” as the Fed’s undeniable clout flexes its muscles.
The 20% drop in the S&P 500 between October and December in face of a global economic slowdown steered the Fed to its abrupt about face in policy with the prospect of NO rate increases this year, even a decrease if global economies continue to slip.
Here’s the rub. If the Fed’s policy change is premature and the economic expansion gets enough of an infusion by the Fed to overheat, the Fed will have to raise rates again.
That will crush the market from the lofty levels it is attaining by way of the panic.
If the economy begins to tank, slipping into a recession later in the year or next year the market will get crushed.
CONCLUSION: Odds favor the bulls, they have the Fed on their side. They can expect the Fed to step in if a correction sets in (a Powell put), either with a policy move, or verbally through its many minions out there on the speaking circuit.
Under present conditions, risks will rise with the market. Breakouts from stock price patterns are popping up right and left, drawing traders in for the kill.
This is fine for the savvy investor/trader.
It’s frustrating for the average investor who sees others making money.
This is classic late-stage bull market behavior. I have found that many investors hate missing a buying opportunity more than they hate taking a loss on a stock (humans being humans).
The danger here will be, the less informed, the less nimble, will jump in with both feet at the ultimate top, when the plug is pulled by the Street, and there goes the portfolio down the tube until the bottom when untethered fear causes them to sell out just before the bear market bottom. (humans being humans)
Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
I think we are in the early stages of a recession, that the Fed sees it and panicked last month by abruptly abandoning its QT policy of raising rates in favor of wait and see. Whether it can salvage this 9 year/8 month economic expansion is the question of the day.
The Street believes the Fed has its back, that any decline will be stopped by some action by the Fed. We have had three bear markets in the S&P 500 exceeding 50% since 1974, so lot’s of luck on that one.
What if 10 years of bull market has drawn the Street into a false sense of security, a cult-like confidence that significant facts can be overlooked/ignored, that there is nothing to worry about, that any dip in prices, even a 20% correction is a buying opportunity ?
Economist, A. Gary Shilling’s INSIGHT refers to a Duke University survey that finds nearly half the CFOs polled expect a recession by year-end. One-quarter of the economists polled by the Wall Street Journal in January see a recession this year, up from 13% a year ago.
While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. On December 10, 2018, Thomson Reuters was projecting Q1 2019 S&P 500 earnings growth of +7.3%. As of February 1, it has slashed growth for Q1 2019 to +0.7% with significant cuts for the rest of 2019.
The Street may be looking beyond 2019 to 2020 when it sees a rebound in earnings. That’s sheer insanity. By then, a recession will be underway. When the Street sees its folly, it will slash 2020 earnings like it is slashing this year’s.
The Fed is running scared for a reason. Respect that !
Savvy, nimble investors can hit ‘n run as the Street fires out its latest “buy” recommendations, new accounts open, existing accounts are harvested, and commissions roll in. The Street thinks it’s back in a cruise control, algorithm buy-and-fret-not-market. Fever festers. Careful !
ON A BRIGHTER SIDE:
January’s 7.9% jump was the biggest in 30 years, The Stock Trader’s Almanac’s January Barometer, published since 1972, has successfully forecast the S&P 500’s year as a whole 86.7% of the time over the last 50 years. Odds are, a strong January will lead to a gain for the year. However, there is no guarantee that between January and year-end there won’t be one or more major corrections. In pre-presidential years alone there were major corrections in 1971,1979, 1987, 2011, and 2015. Pre-presidential election years are the best of the four years in the presidential cycle.
The National Bureau of Economic Research (NBER) is the arbiter of recessions drawing on a host of economic and monetary data to track the beginning and end of recessions, rejecting the simple definition that a recession is two straight declines in GDP.
I think we are is the very early stages of a recession, and that a bear market started last October. The dominos are beginning to tumble. One at a time.
However, The Fed’s abrupt change in policy could buy time for the economy and delay the beginning of a recession.
A. Gary Shilling believes we are headed for a recession and noted his reasons December issue, headlining his issue of “INSIGHT“ with “Looming Recession ?” I have tracked Shilling for decades. He nailed the 2007 – 2009 Great Recession/Bear Market before anyone else. For him to suddenly turn negative is a shocker. He details his reasons in a 50-page analysis that is overwhelming in detail and backed up with stats and graphs. No one in my experience has more economic/investing integrity than Shilling.
Shillings reasons for forecasting a recession are:
1. Output exceeds capacity
2. Stocks fall
3. Central banks tighten
4. Yield curve inversion near
5. Junk bond-Treasury yield spread opens
6. Housing activity declines
7. Corporate profits growth falls
8. Consumers are optimistic
9. Global leading indicators drop
10. Commodity prices decline
11. Downward data revisions
12. Emerging-market troubles mount
13. U.S.-China trade war escalation.
THE PRESIDENCY PROBLEM
Special Counsel Robert Mueller is closing in on Trump, et al, and this is going to get ugly.
The daily disclosure of wrongdoing by this administration will weigh heavily on the market at a time the economy is going in the tank and the stock market is on the verge of a bear market.
An even bigger issue is about to hit the Street right between its eyes and that is, what will happen to stock prices when President Trump is removed from office, or he resigns ?
There are other issues that can crush the market (debt, fiscal crisis, depression), but extended dysfunction in the highest office in our country has the potential for immeasurable damage to stock prices.
Investors must be prepared for the possibility of this happening. If it doesn’t play out that way, be very grateful.
DID YOU KNOW ?
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 116 months, the second longest on record and twice as long as the average length of 11 cycles since 1945.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 1945.
>Of the 10 recessions since 1950,the average time between the low point in the unemployment rate and the start of a recession was 3.8 Months.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.
Investor’s first read
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.