Tuesday, December 18, 2018

Clear as mud! The stock market has predicted 8 of the last 5 recessions

You may wonder what is going on in the world’s stock markets. Now even U.S. Market’s, in particular the Nasdaq is approaching bear market territory. Well, I am guessing here, but then so is every other ‘know-it-all’. Let me take a stab at it. 

Canada is in a bear market for several years now. Not only because of persisting low commodity prices but also do to inept government. Canadian politicians here have made matters worse.  But look at U.S. energy and Anadarko, for example, it is down from a high in September of U.S. $74 to a current low of $48 or 36%. Exxon Mobil is down from a high of U.S. $ 86 to $72 or 17%. The S&P500 Energy sector ETF XLE is down from U.S. $78 to $60 or 33%.  Those are not numbers that make investors happy!  We definitely can not blame it all on Canadian pipelines and politicians; Permian basin producers such as Anadarko suffer from a lack of pipeline capacity as well.

Mr. Poloz of the Bank of Canada just warned for stagflation if the China-U.S. trade war doesn’t come to an end and all tariffs are, as Trump has threatened, to increase to 25%. The oil price these days, more than ever, is being manipulated by speculators, Trump, the Russians and the Saudis. The oil price seems to be far removed from the true oil demand-supply picture which may be closer to undersupply than many would believe. 

This all causes tremendous investor uncertainty while many parts of the North American economy are doing just fine. No wonder stock prices are down but it is uncertainty especially political uncertainty that keeps investors on the defensive rather than economic fundamentals. Most economists see no immediate threat to our North American economy.

This is the picture: interest rate increases are stalling because of the lack of confidence many have in today’s economy rather than because of the fundamentals. The economy is doing fine. This is also the 3rd presidential year of the Donald and guess what, with the upcoming 2020 election he does want the bad news out of the way. As George Bush Sr. learned the hard way: “It’s the economy stupid!” I don’t think Trump wants to go for re-election with the economy in the dumpster or the stock market in a major decline. That is why the stock market performance during the 3 and 4th year of a president often promises to be good.  During the mid-terms Trump had to show that he was tough on those international ‘cheats'; for 2020 he must have a good economy. 

Trump will likely make peace with China and may even play nice in Europe.  Thus, I foresee a recovery of emerging markets as well as in the U.S. so no more peaking US $ while interest rates will remain where they are or even fall. I see also the end of the trade war. This will be the real melt-up that likely will last well into 2020 until the U.S. presidential elections. This will also likely mean rising oil prices and a bit of inflation.  I am really curious to see how Trump will manage all of the above. 

Thus, 2019 should be a good year in the stock markets and hopefully it will also be resulting in good commodity pricing with lots of money to be made. This is the rose-colored picture. How easily could the trade war stretch out? It is not only about getting fair trade rules; it is unfortunately also about claiming ‘victory’’ and ‘saving face’. If the trade war continuous and the market psychology doesn’t improve then we may see a bear market rather sooner than later. Due to the large losses in the energy sector, tax-loss selling both in Canada and the U.S. were unusually severe so will there be a relieve rally that develops in a start of the year rally’?

I maybe hoping for a good 2019 believing that the current market malaise fore-shadows one of those recessions that don’t happen. But I see that matters can easily sour. Thus don’t throw caution in the wind. For now, just sit tight and hope for more clarity. Clear as mud!

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