2019 is looking a little brighter already. US stocks surged on Friday.
You can thank some nice data and the words of Fed Chair Jerome Powell for that.
It gives us a hint of what could be in play around March. You might recall that China and the US are currently in a 90-day truce over trade.
Any hint — or a total head nod — from Donald Trump that the trade war is off could send a wave of optimism through the markets in the same way, but for longer.
That’s the trigger to send US stocks back into all-time highs.
It makes for a compelling window to pick up stocks on the selloff and back this outcome.
The upside is worth it.
It’s not as if the US economy is all that bad. Christmas retail sales reminded everyone of that — up 5%.
That’s not to say it’s without risk. Nothing ever is.
Perhaps the bigger question is: Where do you look first?
Let’s do a quick global tour, imagining we have a few hundred billion dollars to allocate, as some pension fund managers do.
Nobody is going to get excited about Europe anytime soon. The Brexit uncertainty is one thing. Then we have the Italian economy mired in bad debts.
The French are rioting, even after President Macron gave the protestors what they wanted.
I don’t think Europe is as bad as the headlines might suggest, but probably a pass there. Too much uncertainty.
China is demonstrably slowing and carries a lot of external debt. It has more to lose than America from an escalation or continuation of the trade war.
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The best you could say is that Chinese equites are cheap — and the growth of the middle class is a big carrot on a long enough time scale. But Wall Street is hooked to short-term numbers.
One would think few will chase their bonuses in China right now.
Emerging markets? Can’t find anything to get the blood really flowing.
In the US you have record low unemployment, low interest rates and a growing economy — and a cheap stock market.
I think this is where the big money flows in 2019. The Aussie market can coast in the slipstream of sentiment if this happens.
But Mr Market is not going to make it easy for us. He never does. Just piling back into the one-way trade of recent years — US tech, especially the FAANGs (Facebook, Amazon, Apple, Netflix and Google) — is unlikely to work.
It will be something else. But what?
Last year I nominated energy and banks as two sectors to do some heavy lifting. They never really fired. Oil firms put in one stonking quarter. That won’t be repeated in the upcoming earnings season.
We know Buffett was buying the banks in the third quarter. But investors are unlikely to pile into the banking sector like they did with tech.
The growth outlook for the two sectors is just not close enough.
Watch for this alliance to form on Wall Street
What if crypto enters the picture?
Let’s play around with this idea.
Investors chase high growth — at all times. The crypto market got smashed in 2018. But Wall Street laid the groundwork to take it more mainstream…and the fundamentals are there for it to be revived.
It’s also a market that cannot be priced on conventional metrics. But the potential of it is compelling enough for Wall Street to push this as a new asset class for its clients.
There’s a possibility that the big US banks somehow make a move here. This could be a major catalyst for both the crypto market and the banking sector.
For crypto to get bigger, it probably needs to partner with major companies and institutions. That builds trust and legitimacy.
But think of what the banks can do with tech. They can securitise any asset and sell it.
Imagine a developer wants to build a skyscraper. Using blockchain technology and smart contracts, Wall Street could see eventually raise the money via a token offering.
You could pay as little or as much as you want for a piece of the action.
The future rental payments could be programmed into the code to pay out in proportion to your ownership.
Many baby boomers are desperate for income but have meagre savings. Crypto offers a myriad of ways to access payment streams not previously available, and for small stakes if necessary.
This is, admittedly, some speculation on my part of a possible future. But here’s two things I’m watching for over this year:
One: An end to the trade war, and a subsequent optimistic surge in US stocks.
Two: Some form of alliance between Wall Street and crypto that sends investors into a speculative frenzy.
2019 could be a doozy to the upside if I’m right.
All the best,