The stock market put up a tremendous quarter that brought prices within a few percentage points of all-time highs.
Once the Fed convinced the markets it was not going to blindly hike rates to send the economy to oblivion, the market stabilized from its 4th quarter swoon and launched higher.
The other fears that plagued stocks in December are still floating in the collective market consciousness – an inverted yield curve, slowing corporate profits, and tariff wars. I’m not convinced that any of these three worries are about to derail the market.
Inverted yield curve
While there is a lot of talk about an inverted yield curve, one has not actually emerged. Yes, the very short-end of the yield curve is inverted. However, from 2 years to 30 years it is not. In fact, the curve recently has steepened a bit.
Skepticism about corporate profits
When it comes to skepticism about corporate profits, this is not a new concern.
In fact, bears have been talking about a weak economy and earnings for the entire bull market and it hasn’t prevented stocks from grinding higher.
Ongoing trade wars
The ongoing trade war is the one that concerns me the most. Global trade has proven to be a key ingredient in global growth.
The stocks that make up the S&P500 derive about 45% of their revenues from sources outside the US. Supply chains are global and barriers to the free flow of goods can cause disruptions that would drag on profits.
Despite the downside, I believe there is a higher probability that the US and China reach some acceptable accord than the probability that a trade war erupts between the two. If a benign deal is announced, the markets will have a reason to rally.
A reason for the markets to rally
The bearish argument is always the easiest to construct. In 2018 the stock market was down and for about a year and a half stock prices were flat. This is not unlike the 2014-2016 time period where stocks went nowhere and was a frustrating time for investors.
The flat market proved to be just a pause in the upward market trend. This time could be similar. If the market manages to make a new high, investors who have been on the sidelines will be drawn in, refreshing the bull market and drive another upward leg in stock prices.
First-quarter earnings will be released over the next several weeks.
Expectations have been lowered so it is possible that we may see profits beating expectations.
The expectation game is a typical exercise on Wall Street. The market builds in a conventional consensus on what it thinks revenue and profit will be.
Often the analysts tend to have relatively low estimates which helps companies “beat” their forecasts. Most of the time stocks react positively to the “beat”.
Why do estimates tend to be lower? There are two possibilities. One is what was mentioned before. The bearish case is the easiest psychologically to build. The second possibility is that the industry prefers to set up a positive market surprise.
In either case, the next few weeks will be important for investors.
— Ian Green, Pendragon Capital Management
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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.