December 8th, 2018 – 6pm –
In July, I wrote a piece stating ‘The Market Character has Changed.’ I was made fun of for being too cautious and missing out. In September, I wrote a piece regarding action steps to take ‘While Times are Good‘, and when I didn’t agree with Buffet’s view of Apple on national TV, I had to fight for the few seconds of air time they’d give me to express my opinion. CNBC Link HERE. Closer to home, when we took stops on positions raising cash and booking some losses to step aside, I’m guessing many newer clients questioned my sanity; a few expressed their concern regarding my bearishness. I don’t blame them.
I relay all this, not at all for an arrogant chest bump; but, rather, to express how difficult it is, at times, to remain an independent voice of reason among a sea of popular consensus. It is for this reason that one compensates an investment adviser, and, in my opinion, if you’re paying for a consensus driven asset allocation, I’d love to set up a time to chat about earning your business. On the other hand, if you’re in a self directed buy and hold asset allocation and desire something different, the same offer applies.
Despite what has been, on all accounts, horrible market price action, I do not believe the worst is behind us. Unfortunately, despite the incredible declines in such names as Apple (down 29% from its peak) or Facebook (down 37% from its peak) or Boeing (off 18% from its peak), the general market has yet to reflect the erosion taking place under the surface; and, therefore, complacency and the index bubble remains in full effect.
In fact, what I find the most concerning about this market action is just how complacent the investment community has become. With an S&P 500 down a mere 1.5%, I fear it will take quite a bit more before folks wake up to the fact that things are changing dramatically and panic sets in. It will be at this point when opportunity arises.
Of course there is a possibility that this is a mere normal and healthy correction; thus, providing more of an opportunity than a warning. At this very moment, I don’t agree with this thesis but you can bet I am on the lookout for signs of health and opportunity. So far, I don’t see them.
More than ever, I have been asked to provide my market thoughts about commercial breaks, interruptions, random questions and the like, I find it difficult to ever fully relay my view. Furthermore, as you know, my opinion is fluid, and at a moments notice, once the facts change, I reserve the right to change my mind. With that being said, I thought it important to run through a few ideas.
At present, the recent market action is as bearish as I have seen it in several years. While we feel and look oversold, I believe that this week we may see another flush lower, in order to wash out some stubborn holders and suck in some more opportunistic shorts. It’s at this point, I believe we can see quite a snapback. I am looking for a bounce that sets the stage for year-end optimism and a Santa Claus rally.
Once the new year begins, the market will take its cues from earnings and corporate fundamentals. It is my opinion these will not be great and expectations, thus fundamental valuation models, remain elevated. While the broader averages may not show much of a decline on balance for 2018, it will be a fundamental adjustment in 2019 that brings down the general market.
I do not believe we see much resolution in China, which leads to higher input costs and ultimately higher prices that are passed on to consumers. With the economic data slowing, the Fed will be in quite the predicament seeing inflation rise with economic data on the decline. They will be forced to make a decision on letting inflation loose or continuing to tighten. I believe, for the market and administration’s sake, they will chose to follow the economic data; thus, halting their interest rate increases. Many believe they will begin to cut; at this point, I do not.
Inevitably, in my opinion, this will lead to fundamental erosion, combined with inflation. Stocks will trade lower, hard assets will trade higher and, eventually, real value will develop and investors with cash will take advantage of deep discounts in solid companies.
Throughout any economic or stock market evolution, due to noise and nonsense, short term volatility will unfold. It is not our job to be swayed by the short term gyrations; but, rather, stick to an overall thesis that guides our way over a longer period of time.
At present, the market remains dangerous; however, I believe we’re close to an oversold rally that may be worthy of participation. I do not believe that this will lead to a new bull market; rather, it will be an intermediate respite within what I believe to be the current bear market.
Regardless of how it shakes out, our goal will be to work extremely hard, to the best of our ability, to remain on the right side of the market, and take incremental steps towards achieving the longer term financial goals of our clients.
I will continue to update you with my thoughts regarding the market, as price action dictates. In the meantime, I want to wish you and yours a wonderful holiday season and Merry Christmas. Remember, to keep this crazy time of year in perspective; hug your loved ones, be generous to others and take a respite from the hectic pace of our current society.
Until next time