December 17, 2018

The major stock market averages fell at the open but quickly pared losses. At the moment, the Dow and SPX are down 104 pts and .5%, respectively. Utilities and real estate sectors are down over 1% in early trading, whereas the financial sector is finally catching a bid. Semiconductors are up 1% as well. The VIX Index is up around 22.5 and VIX January futures are up around 21. That tells us traders are still nervous and expect continued volatility. The dollar is a bit weaker today, but commodities aren’t uniformly higher. WTI crude oil fell back to $50/barrel. Copper is down again—now -20% on the year. That ought to tell you China’s economy is slowing. Bonds are catching a bid as interest rates tick lower. The 5-year and 10-year Treasury note yields are hovering around 2.71% and 2.86%, respectively.

Surveys conducted by the American Assn. of Individual Investors (AAII) show that do-it-yourself investors are plain scared. The proportion of investors describing themselves as bullish has fallen to 20.9%, whereas the proportion of bearish investors has rocketed to nearly 50%. We haven’t seen a bearish reading like that since the beginning of 2016. Remember, that was when oil plunged to $26/barrel, US corporate earnings were in decline, and China’s financial markets were in disarray. Importantly, though, professional investors use these surveys as contrarian indicators. In other words, they like to invest when bearish sentiment peaks.

Wall Street research shop Sanford Bernstein just reduced its 2019 S&P 500 Index target. Whereas the firm’s prior expectation was that the SPX could rise 21% by the end of next year, it now expects a return closer to 14%. So I say, how is that bad news? Investors would give their right arm for a 10% return next year! There are still a few Wall Street strategists & economists who predict better than 20% returns next year, but most are more cautious.

Famed bond manager Jeffrey Gundlach recently said the Federal Reserve is on a “suicide mission” of rate hikes that could cause real problems with our financial system (CNBC). The reason: higher government deficit spending. We’ve added to fiscal stimulus (with higher government debt) very late in the economic cycle. This is unusual. And of course, higher interest rates down the road could really hurt the US Government’s ability to service its rising debt load. At the same time, he says the US stocks are headed into a bear market. Despite a good economy, investment markets are not acting well. “We’ve had pretty much all the variables that characterize a bear market.” He cited the crypto bubble a year ago as well as the fact that stock markets all around the world are correcting at the same time. He talked about the “weird yield curve” as a concern, and also mentioned consumer surveys regarding future expectations “are really bad right now.” So while the stock market may be temporarily oversold, he believes it’s “almost for certain” we’ll have another leg down.


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