Month: January 2019

In our December 27th blog post we wrote that the most likely scenario from the oversold condition and the rough Christmas week was an 8-10% rally from those levels, and that until the S&P 500 traded above 2600, we should continue to have in our mind that the market is in a downward trajectory.

Well, the world didn’t end and the S&P 500 has miraculously rallied over 11% to close above 2600 for the first time since December 13th.  The Federal Reserve has struck a more patient tone to the gradual rising of interest rates and the first taste of corporate earnings showed significant slowing in the fourth quarter, but also that the American consumer remains quite healthy.  As long as the data is consistent through earnings season, we feel the likelihood of recession remains small.

But just because we don’t see a recession coming, does that mean the stock market will continue to drift higher?  The short answer is no, but we’re now into the place that was previously support for the stock market (now could be resistance).  We anticipate a pause in the stock market’s advance, probably more of a wait and see approach to earnings over the next 2-3 weeks, but once we’re through most of the reports, it’s quite possible (even probable) the market stops pricing in the sky falling, and we could continue a very healthy rise throughout most of 2019.  Just like last year, the S&P 500 is up quite a bit in January (4.5% and counting).  If we continue at this pace, the S&P 500 will be up almost 50% this year!  That’s definitely not going to happen, so we need to remain on guard.  We remain cautiously optimistic, because things can change very quickly.

The biggest takeaway from the last month should be a confirmation that your long-term goals shouldn’t be affected by short term market gyrations.  Panicking and getting more defensive over the last month was the WRONG move.  If you’ve felt like the short-term price movements over the last couple months were too much to handle, let’s setup a conversation and tweak your plan so you can sell enough to get to sleep at night.  Now that we’ve had a chance to breathe, let’s look at your plan, unemotionally and in the light of day.

As for our picks in 2019, an update is below

• China deal – nothing here, despite the rhetoric, but FXI is up 5.48% YTD
• Brazil (EWZ) – Up 5.28% YTD
• Semiconductors (SMH) – up 2.13% YTD, AMD up 5.5% YTD
• Crude Oil – up 13% YTD
• US Dollar – down .61% YTD

– Adam

People love the hot “stock” tip.  Well my usual answer when people ask me about the stock market is “I have no idea”.  This is infuriating to most people, but also true.  I do have some thoughts, but still not sure they are actionable intel.  I do, however, like the idea of being judged in public and having a complete record of what I was thinking at the time and why.  This seems as good of a place as any to do that.  Proceed at your own risk.

1. The trade war with China will end sooner than most think. Although it would appear that China doesn’t have to rush into any agreement, the tariffs and protectionism of the US consumer are hurting the Chinese economy. More importantly, President Trump views the stock market as his report card (poor choice on his part), so saving face, getting a win with some type of agreement, quickly, will gain him favor moving into 2020 (which is ANOTHER election year, can you believe it?).

2. I’m going to double down on my (bad) call from last year regarding emerging markets. Brazil is my favorite, and I do believe that without the trade war in China, the emerging world may have been on par with the US. If you’re trading at home (I wish you wouldn’t, but I understand), EWZ is the Brazilian stock market ETF ticker symbol.

3. Long Semiconductors – For those of you following the chipmakers over the years, you will know that this is a cyclical business. The semiconductor sector (SMH) was down almost 30% from high to low. In my opinion it’s a little overdone, although there is certainly room for this one to fall a bit more before it decides to bounce. Favorite names here would be SMH itself (the index), and for you more adventurous souls, AMD.

4. Long Energy and Commodities (Specifically WTI Crude Oil) – In my opinion, oil could go from $45 to $60 (33% gain). This is simply another mean reversion call, as I believe the washout in oil has priced in a massive world demand slowdown.  While I do believe that earnings estimates will be tempered moving forward, oil is pricing in a recession (or worse), and until we print negative GDP numbers that will continue to be speculation. Best way to play here is XLE, XOM, or USO. As reminder for those income-focused investors out there, XOM pays a 4.7% dividend yield at this price. Not too bad…

5. Short US Dollar. This could happen with the Federal Reserve backing off their relatively inflexible tone about raising interest rates, or anywhere else in the world getting their act together (best chance is the UK). We’re already slightly overweight a negative US dollar position in our portfolios, so no need to overweight even more on your own.

Be Careful Out There!

– Adam