Last Friday, Chris Wang talked about the strong jobs reports and growth stocks, Luckin Coffee (ticker LK) and Activision Blizzard (ticker ATVI). Check out the videos to learn more. Hear what the strong jobs report means for the market and importantly what it means for the still very accomodative Fed. Also find out why Chris is excited about the prospects of LK and ATVI.
The bull market has paused for the past few days as fears of the coronavirus spread. The first case of the virus in the US has the media in a frenzy and now people are hyperfocused on the possible effects of the economy and investments. Should you be worried?
This is one of my favorite posts to write every year as we get to look back on Wall Street predictions and see how they panned out. We have done this in 2014, 2015, 2016, 2017, 2018 and 2019 so it is a tradition to see which strategists did well and which missed the mark.
Last year, the strategists predicted a bull market for 2019 with an average target of +13%, 2995, for the S&P 500. This target looked especially bullish because of the December 2018 selloff, but it turned out that only Deutsche Bank's Binky Chada was bullish enough with a target of 3250 -- the S&P 500 finished at 3230.78. Brian Belski collects honorable mention with a target of 3150. Now let's take a look at their thoughts on 2020...
In the past, the Fed announced their clear intention to use quantitative easing to stimulate the economy. They even named QE2, operation twist. This time, it has been much more stealth in nature. While the Fed has signaled its intention to pause on interest rate cuts, they have reversed course in shrinking their balance sheet and may instead drive it to new highs in 2020. This is clearly a short-term positive for risk assets and has sent the stock market to record highs.
"If we’re both going crazy, then we’ll go crazy together, right?" — Mike, Stranger Things
In today's world, it feels like we are all going crazy when you deal with the upside down world of negative interest rates. While negative rates haven't landed in the US yet, the 30-year Treasury rate fell below 2% for the first time ever. It is likely inevitable that we will have to deal with the situation in the not too distant future. So what is life like in the upside down?
Back in 2016, we wrote "Watch out! Negative interest rate policy is coming to the US sooner than later." To us, the future feels inevitable with virtually all the other developed nations in negative territory again in 2019. PIMCO's Joachim Fels echoed this thought saying that it's "no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative."
The trade dispute between the two largest economies continues to deteriorate and this is not a surprise to us. It has been very clear that the current US administration is unlikely to make a deal with the China. The gap is too wide between the two countries so it is hard to envision a deal coming together. It seems to be getting worse and we don't expect a deal anytime soon. Back in our January conference call for clients, we pointed to VP Pence's speech from October 2018 at the Hudson Institute. If you want to understand the big issues, this is a must watch.
This morning, the much watched yield curve has inverted for the 2nd time with 10-year Treasury yields (2.27%) dropping below 3 month T-bill rates (2.36%). Many view the yield curve inverting as an early signal of recession. For those that view the glass as being half full, most people look for the 10 year vs the 2 year inversion and that hasn't occurred yet. Secondly, once the inversion takes place, the market often doesn't peak until months later. For those that view the glass as half empty, the inversion is a sign that the bull market is nearing an end.
European growth peaked at the end of 2017 and has been slowing ever since. Despite the ECB saying there is no recession in Europe, there is mounting evidence that Europe is entering a recession. Germany, which is often seen as the engine of the Eurozone, saw its GDP contract in the 3rd quarter and its manufacturing PMI fell below 50 in January. Italy has waived the white flag and is already in recession with the European Commission forecasting just 0.2 percent growth for 2019. The ECB just stopped its asset purchase program in December and now may have to try to stimulate again.
We are currently in the thick of earnings season as companies are reporting their quarter ending December 31st. Expectations are for S&P 500 earnings growth of over 20% which is an extremely strong number especially considering that the previous year grew a healthy 12%. However, lapping that type of growth is going to be a challenge, and forecasts are being revised down quickly for the first half of 2019. That is why we believe there is a growing likelihood of a slight earnings recession occurring in 2019.
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