This Morning’s Log Entry

11/5/19 Tuesday

As I suggested in Sunday’s blog post, given the latest momentum, historical precedent (past years like 2019), seasonality, odds of soft Brexit and huge incentive to ink a “Phase 1” U.S./China trade deal, the year-end (return, as opposed to risk/return) setup looks good for equities. Potential problem being, sentiment is ramping up notably, and — given the abysmal predictive track record of the short-term consensus — that’s a contrarian indicator. 

In terms of data; on balance, and globally, it hasn’t been good. Manufacturing the world over is essentially in recession. The services sector, however, is bucking that trend; today’s U.S. ISM Services survey handily beat expectations. Historically, manufacturing has led services into recession (then all hell breaks loose as the consumer follows along), but, again, for now services data is encouraging.

The S&P initially rallied on this morning’s ISM report, then meandered into the red (modestly) a few minutes later. In terms of asset classes and sectors, clearly, interest rate prospects are to a large degree driving the markets this morning: Gold, bonds, utilities and home builders lower; financials higher.

The market underpinnings are currently anything but solid. We can attribute current levels entirely to central bank stimulus and prospects for a U.S./China trade truce. Others will cite a decent earnings season, but that has come against markedly reduced expectations, uninspiring revenue numbers and lowered forward guidance.

Below the surface looms what I view as an epic subprime bubble in the corporate bond market. What appears to be, and is, dangerous complacency speaks to an utter desperation for yield among institutional investors (read pensions and benchmark-chasers) and a belief that central banks will print money and push interest rates into the gutter ad infinitum. This is an unsustainable phenomenon, and virtually assures stark global economic consequences when it ultimately unravels.

While again, it makes sense that stocks will continue to melt higher for the time being — given a far less-than-favorable risk/return setup — our fiduciary responsibility demands that we remain guarded on behalf of our clients, for the time being!

P.s. Flying in the face of the presently-rosy short-term scenario is the latest signaling from our VIX, volume and short-interest indicators. All 3 point to heightened near-term correction risk.


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