In the midst of last month’s market bloodbath, we ended the newsletter with my favorite investment quote, “be greedy when others are fearful and fearful when others are greedy.” For those that happened to do just that, they have been rewarded with the market up 10% since the newsletter was released on Christmas day. Just goes to show you the type of volatile trading environment we are now in fueled by a combination of computerized trading and piling in index funds, with a daily dose of Trump and the dramaticized media.
Anyway, last month we discussed how it felt like the Fed was breaking up with the market. From last month’s newsletter:
There may have been enough negative data to pause the rate hikes, but they felt the need to hike anyways. It was only a quarter of a point, but the way the market reacted felt like the final stage of a bad breakup. I felt like the market put him to the test where a different Fed may have flinched amidst the market volatility and paused. But like a bad breakup, Powell hung in there and stuck to his guns.
The market then retaliated with one final major “tantrum.” Last month I wrote, “while this breakup hurts now, it may be for the best down the road.”
It may have been just what the market needed. Just like breaking it off with a crazy ex, it may be painful initially, but is for the best down the road. Now for the first time in years, it feels like we are no longer fighting the Fed. Even my man Cramer can be quoted January 10th saying “we are no longer fighting the Fed.” For years we have been dealing with bad news being good news and vice versa, just out of fear of what the Fed might do next. We wanted good news but not too good, bad news but not too bad or the Fed may really act. But now, at least for the moment, it appears good news is good news with the way the market has responded around a few events such as the jobs report.
While the Fed is no longer a headwind and now possibly a tailwind is certainly good news for the bulls, but there are still plenty of reasons to still be worried.
- There is a fear we could be toward the end of the economic cycle. We are still in one of the longest expansions in US history and it can’t last forever. And the fact corporate America is likely overleveraged with the Debt to Earnings ratio at the highest level in 15 years is not helping matters.
- We still have yet to reach any kind of a real deal in regards to China trade. While I think this will be resolved (because both sides have too much to gain/lose), it is still very important to monitor as they are our most important trading partner.
- The new variable is that we have a chance of a Hard Brexit (where the UK not only leaves the EU but the single market and customs system as well). This would send ripples through the market with more global uncertainty.
So why those are causes for concern, there are also reasons to think this market may still have some steam in it.
- Fed has backed off as we have discussed. Now they are no longer focused on hikes but taking a “wait and see approach.”
- This should be a big season for tax rebates. Many people are still withholding the same amount as they have in the past and should be looking to get a boost this year.
- Consumer should be in good shape as the unemployment rate remains very low while the participation rate going up means people are still coming back to the labor force.
- Stock valuations have come down to reasonable levels and investor’s emotions seem be back in check after the rollercoaster ride in December. These are what I like to see in a healthy trading environment.
Currently, the market seems to be in a range here as we look for the next move. As we start to see this earnings season unfold, we should start to get a better idea of which way we go. So while I expect the volatility to continue, at least we seem to be back to fundamentals. There is definitely something to be said for that.
Now let’s see if the economy will sink or swim…