Around Christmas, when the market was down about 19% from its September 2018 peak, I wrote a blog (Don’t Panic! – December 28) urging people not to participate in the market panic that was going on at the time. Was that good advice?
It would be hard for it not to have been good. In less than a month the market is up about 13% from the December lows, and it seems like everything is up. Now the question is, what do you do next?
The first thing I’d do is try to figure out what’s likely to happen going forward. There’s no shortage of opinions, and they run all over the place, which means they’re not all that useful, at least not in aggregate.
Different people have different ways of looking at things. I like to think about what happens in the market in four broad metrics:
- Fundamental •Technical •Sentiment •Macro metrics
Fundamentally, things don’t look good. Many companies hit what looks like peak profit margin and sales growth in the third quarter. That was great, but going forward those peak numbers are what we’ll compare future earnings against. That’s going to be tough. I’m sure some people will look at what the market has done since ‘earnings season’ started earlier in January and laugh at my claim. I’d respond they’re only looking at the results of financial companies, and that’s ignoring a broad swath of warnings particularly from the tech and retail spaces. Earnings season has a long way to go, and the downward slope we’ve seen on market earnings estimates could make for some exciting downhill skiing.
For technical metrics, I don’t claim to be any kind of great technician, but I do try to take a look, if only because other people do. Obviously, there’s a great deal of technical metrics that have been put forward regarding stock prices, but I think the most interesting thing is trends. Are we trending up or down? From a short term perspective I think you could say the trend is up, though admittedly on much lower volume. Longer term, the trend seems down. That high we hit last September was unable to be beaten at the swing up at the end of November, and while we’re now climbing fast, we’re still a long way from that September market peak. We also have both the 200 DMA (Day Moving Average) and then the 50 week MA (Moving Average) coming up as technical resistance points to further upside. A low volume rally into a resistance point is a scary place to be.
Sentiment can be looked at a lot of different ways as well. A very simple, quantitative way is the CNN Fear & Greed Index. That’s been soaring from an all-time low of about 3 when I wrote the Christmas blog to 51 now, which is considered neutral. Other factors also show at least a real relaxation of fear. That seems fair, based on the wide range of sentiments out there. Perhaps it’s most fair to say there are a lot of people who are invested, but nervous, and maybe it wouldn’t take much to shake them again. It’s also interesting how people are interpreting news now. How about positive China trade talks progress that the Treasury swiftly denies? Good enough! Or the Fed will be accommodative forever? Even better!
Macro data is coming off a great run through mid-2018, where the economy kept getting better and better. It’s hard to see how we can improve upon that performance. Thus, for the first time in quite a while, the economy is likely to slow. I’m not talking negative growth, just a slower pace of growth. China is clearly struggling as well. Can that change? Seems very unlikely. People will talk about a trade deal or reopening government. Yes, those would help, but not enough to change the direction of macro data, just the pace of the decline. I do have to note the elephant in the room, though. Central bank accommodation. That seems like the star of the current party. Personally, I think it helps take away really grim downside scenarios, at least for now, but doesn’t guarantee upside. Is the Fed going to buy a few million iPhones?
Obviously you can disagree with me, and I would encourage you to. Where do you think I’m wrong and what effect do you think it will have? I try to look for where I’m wrong all the time. In this business, that’s very healthy.
What would I do with the above analysis? I’m fairly long-term oriented, so I look at this and have my eye on the exits. How long can a sugar rush of hope last? If we keep pricing in a trade deal and Fed accommodation, what happens when we actually get those things? For that matter, is the Fed really going to give a market already on a sugar rush another candy bar? Anyone ever heard of “sell the news?” I’ve taken my own advice, and have been slowly building cash in portfolios as this rally continues. I’ve gotten rid of names I didn’t really want to own as clouds began to appear on the horizon, or their stock prices have managed to hit levels that don’t seem like they might be materially bested anytime soon. We’ve had a glorious short-term rally, but I wouldn’t expect it to last.
That said, neither do I expect markets to “plunge,” though I suppose that’s a relative word. I always love those stories that refer to a stock down 3% as ‘plunging.’ Could we touch the lows from last year? Sure, that’s mostly just giving up the frenetic rally we just had. Where are opportunities and where are problems? We’ve already seen warnings from retail and tech. I’d heed that call. Where are opportunities? In my mind the easiest thing to say is that value should beat growth this year. Growth has had an incredible run, and given the economic backstop it deserved that. The backstop is gone, growth is expensive, and value should provide fertile hunting grounds for a good while.
Mostly, I’d try to make sure you’re pretty comfortable owning what you own after what we’ve seen since Christmas. We’re going to see a lot of earnings and data over the next few weeks. What do you want to own through that? For my part, I’m particularly worried about retail and tech earnings. Are you worried about anything? Do you need to protect your assets better?