Tug of War

With the S&P 500 now trading at 16 times its 2019 consensus earnings estimate in a declining earnings environment, it is now time for the fundamental valuation anchor to begin to resist the very strong pull of a technical bounce since Christmas. Either the outlook for earnings is low, or there is no more slack in the stock market’s rope. Most potential future impacts continue to appear to be negatives for the market: global growth slowdown, taxation of buybacks, deteriorating credit environment, war on the wealthy, etc. As far as a market positive, there is still hopes of a trade agreement with China but nothing is signed as of yet. Given that the market moves higher on every mention of the soon-to-happen ‘great’ China trade deal, you have to wonder how much more of a positive market impact there will be left for the official announcement.

The market also remains hinged toward any Fed official comments regarding balance sheet changes. Rate hikes are no longer interesting since they are assumed to be done for this cycle, so the market has shifted to the next best thing to over-analyze. For now, it appears that the consensus is to slow or stop the balance sheet run off. The farther away from QT, the better for this stock market. Who cares about the future? This Fed lives for the present! All I can say is be careful with your risks. I continue to favor Emerging Market exposures (stocks, bonds and forex) to the United States. Gold continues to act well as the Fed gets loose with QT and the U.S. dollar scratches its head. And cash still yields nearly 2.5%.


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