Market & Economic Red Flags for 2019

In 2019 I started our MicroCap Market Monitor which is emailed to subscribers on the weekend. This is an additional service that is included with our regular subscription ($164 CDN per year).

I am making the report from February 3rd public on our blog as there are warnings here that people should pay attention to.

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I didn’t post everything relevant from the week as the negative / bearish tone was quite overwhelming. This isn’t a case where big money managers view bearish sentiment from small investors as a contrarian indicator to signal the market will turn bullish. This is a case where the majority of well known managers are seeing the same market “concerns”. It definitely means a person needs to avoid excessive risks.

BULLISH

Since December 24, when the S&P 500 registered its lowest mark of 2018 (and a near 20% pullback from its September highs) we’ve seen a robust rebound. The index has rallied more than 12% since then.

I don’t know whether we’re out of the woods just yet… but between a couple of bullish indicators that I’ll discuss below, and my Maximum Profit system signaling four new buys last week, I’d say that the outlook is positive.

https://www.nasdaq.com/article/2-indicators-signal-all-clear-in-the-market-cm1089500 

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BEARISH

Jeff Kleintop of Charles Schwab says the market rally we’ve seen this month could have a little more legs before running into some pressure from a heightened risk for a recession later this year.

https://www.cnbc.com/video/2019/01/28/kleintop-economic-momentum-continues-to-slow.html

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The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank.

“Over time, you will probably see several more market events like we saw in December,” Pinto said last week in an interview at the World Economic Forum meeting in Davos, Switzerland.

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Stephen Roach [ faculty member at Yale University and former Chairman of Morgan Stanley Asia] warns that rising protectionism could spark a surprisingly swift deterioration in global economic conditions. The global trade cycle is facing major stress in 2019 and downward revisions have just begun.

https://www.interest.co.nz/business/97811/stephen-roach-warns-rising-protectionism-could-spark-surprisingly-swift-deterioration 

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Institutional Investor hall of famer Richard Bernstein is adopting a more nuanced bull stance on stocks – citing the deceleration of corporate America’s profits. “The most important thing in 2019 is U.S. profits growth is going to slow. By our estimation, it’s going to slow from about 25 percent to about 5 to 8 percent.”

“One should temper their enthusiasm. We’re still overweight stocks. But I think you have to really to temper that enthusiasm with that kind of deceleration in corporate profits,” he said. “The number one factor in an equity portfolio in 2019 has to be quality and stability of earnings.”

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Nigel Bolton, head of BlackRock’s European equity team, wrote: “Global political uncertainty remains high and continues to impact markets adversely. The European market is set to face a number of issues this year, not least the impending Brexit date.”

He added: “At this point in time, we have looked to increase the resilience in portfolios by increasing capital towards companies with higher levels of repeatable revenue and stable cash flow profiles.

“We have overweight allocations to healthcare and industrials, particularly the aerospace cycle and some speciality chemicals, and more defensive technology, such as SAP [the business software company].”

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U.S. consumer confidence still looks relatively high even with recent declines, but billionaire investor Jeffrey Gundlach says the underlying data suggest a recession is coming.Gundlach, chief investment officer of DoubleLine Capital, which oversaw about $121 billion as of Dec. 31, tracks confidence as a leading indicator of recession. In a Jan. 8 webcast, he said consumer expectations were “flashing yellow” for recession. Known as a contrarian, he was one of the few money managers to predict that Donald Trump would be elected president and that stocks would fall last year.

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Jonathan Golub, chief U.S. equity strategist at Credit Suisse, James Barty, head of global cross asset strategy at Bank of America Merrill Lynch, and Robert Tipp, chief investment strategist at PGIM Fixed Income, discuss the global market impact of China’s economic slowdown.

https://www.bloomberg.com/news/videos/2019-01-29/china-s-slowdown-is-felt-far-and-wide-across-markets-video

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NEUTRAL

Binky Chadha, chief global strategist at Deutsche Bank, looks forward to the Federal Reserve’s interest rate decision as his firm sees rate hikes “off the table.”

https://www.bloomberg.com/news/videos/2019-01-30/fed-has-no-reason-to-nudge-market-one-way-or-another-chadha-says-video 

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MISC

“Investor conviction is low, whether a bull or a bear – not surprising given the savage volatility seen in December 2018, which effectively destroyed the playbooks for most investors,” Fundstrat Global Advisors strategist Thomas Lee said.

Tobias Levkovich of Citigroup noted that this attitude prevails globally: “A trip visiting clients in Singapore, Hong Kong, Taipei, Tokyo, and Sydney left us with the sense of underlying discomfort with the market’s strength since last December.”

A pullback appeared logical from the Jan. 18 closing high of 2,670, and one still does. But the neutral, diffident sentiment and still-reserved level of risk-taking among professional and institutional investors is a net positive and would limit the depth of a setback, all else being equal.

Wells Fargo equity-derivatives strategist Pravit Chintawongvanich said Thursday: “Light positioning and cautious sentiment is probably the biggest argument for near-term bullishness. Significant de-risking happened in Q4 ’18, and most investors don’t seem to have caught the rally on the way back up.”