World markets are testing our mettle right now. The macro outlook is uncertain and negative.
The trade war is like a pall over the horizon, stretching as far as the eye can see. And yet the US administration persists in this madness.
It’s a nightmare for US energy providers and US farmers.
And yet US stocks in general seem to be weathering all this reasonably well.
Reuters reports that earnings per share are up 2.7% for the companies in the S&P 500 that have reported their second quarter earnings.
Some must have done a lot better than that. Starbucks, for example, is up 50% for the year.
And yet signs of fear are everywhere. The haven currencies, the Japanese yen and Swiss franc, are seeing inflows. Gold keeps rising.
Money market funds in the US now have assets at the same level as in 2009.
My old mentor always kept an eye out for cash levels like that.
Markets are exceedingly unlikely to collapse with so much money sitting on the sidelines.
Is it possible that sentiment is way worse than reality?
Bull markets don’t die like this
It might sound like a simple — perhaps even foolish — observation.
But share markets, historically, don’t ‘top out’ on such negativity. Bull markets are born in pessimism and die on optimism.
Nothing about today feels like a ‘top’ to suggest there’s no upside left in the stock market.
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We’ve talked about the parallels with today and 1998-2000 before.
The Asian financial crisis roiled the market, Russia defaulted, and the massive hedge fund Long-Term Capital Management went broke at the time.
US stocks managed to ride all those hiccups out before peaking in March 2000.
Could we be setting up for some sort of repeat? Fundamentals suggest it’s possible.
There is one other thing I’ve had in mind all year. China unleased heavy stimulus in January.
I saw an analyst point out that this wouldn’t show up in the numbers and commodity prices until the second half of the year.
We’ll have to see on that.
In fact, we could argue that China’s resolve in the face of Donald Trump’s pressure suggests that the Chinese domestic economy is holding up better than we generally presuppose.
How well do GDP figures capture what’s happening over there?
Probably not particularly well.
We’ve put our stake in the ground since the start of this year — stay cautiously bullish.
The volatility and emotion make it a bumpy ride. But there are going to be times throughout the year when this happens.
I still think that if something is to bring the markets down, it will be something no one is looking for.
Everyone is now positioned for the trade war to continue indefinitely, if not get worse.
That means it must be built heavily into the markets already.
Something new must change this dynamic to shift the markets up and down in a big way from here.
I’m holding steady until proven otherwise.