January 2, 2019

The major stock market averages gapped down at the open but quickly recovered. The Dow is currently down 14 pts and the SPX is down .37%. Energy stocks are bouncing 2% on higher oil prices. And some key growth industries—banks, semiconductors, retailers—are also in the green today. Defensive sectors are down on the day. The VIX Index is hovering around 25; still considered elevated but well off the highs of 12/24. Commodities are trading mostly higher today; WTI crude oil is back up over $47/barrel. Any recovery in oil prices will be viewed positively by investors. As you know, it has been our belief that oil prices have been manipulated by geopolitics and therefore the 40% slide in oil doesn’t suggest a global economic downturn. Clearly, the bears disagree. Bonds are trading mostly higher today as yields tick lower. The 5-year and 10-year Treasury yields are down around 2.51% and 2.67%.

Tony Dwyer of Cannacord Adams says the US stock market is now in a bottoming process. From the beginning of October through Christmas Eve, the S&P 500 Index (SPX) fell nearly 20%. He points out that over the last 40 years, there have been three instances of a roughly 20% decline that did not accompany an economic recession. Each time, the market followed the same path. Following the decline, “you get a sharp rally off the low for a couple of weeks, four to five weeks later you get a retest, and then you move to new highs.” Mr. Dwyer therefore predicts a pretty rough first quarter of 2019 with the stock market falling back to Christmas Eve lows before it can recover. During this “intermediate bottoming process,” he’ll be looking for a collapse in volatility and a sharp reversal in the SPX. Those conditions will signal the buying opportunity. “As long as there isn’t some kind of major collapse in credit from the Fed, something going on extra with the Fed that we haven’t already seen, you should be able to make a new recovery high.”

China’s economy is clearly being affected by the trade war. Today, we learned that China’s official business activity index fell to 49.4, signaling contraction for the first time since early 2016. Typically referred to as a manufacturing PMI, the index measures sentiment among business leaders. As with any PMI gauge, readings below 50.0 means business activity is contracting. Of course, trade tariffs have a much greater impact on manufacturing & export businesses than the do on domestically oriented services businesses. And so it’s no surprise that China’s non-manufacturing PMI is faring better at about 53.8. But unlike the US, China’s economy relies much more on manufacturing than it does services. So just like 2016, you can probably expect huge fiscal/monetary stimulus from the Chinese government this year.


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