MISCONCEPTIONS CAN LEAD TO DISAPPOINTING RESULTS
2018, 2007, Charts, And The Wisdom Of The Crowd
TRADE WAR TO BRING RECESSION AND BEAR MARKET?
Charts help us monitor the market's net aggregate opinion regarding all subjects on all timeframes. When the net aggregate opinion is bullish, stocks tend to rise. When the net aggregate opinion is evenly distributed between bulls and bears, markets tend to go sideways. When the net aggregate opinion flips over to the bearish camp, stocks tend to fall. Thus, charts help us monitor the wisdom of the crowd.
2007: 73 DAYS AFTER MARKET PEAKED
In 2007 after the market peaked, investors had to deal with a recession and a bear market; stocks dropped over 50%. In 2018, the S&P 500 peaked on January 26, or 73 calendar days ago. The chart below shows the S&P 500's 110, 115, 120, 125, and 130-day moving averages. On the left side of the chart the fastest moving average (blue) is on top and all the moving averages have positive slopes. The right side looks significantly different with blue on the bottom and all the slopes are down, indicating market participants were concerned about the longer-term prospects for a recession and bear market.
2018: 73 DAYS AFTER THE MARKET PEAKED
The present day "wisdom of the crowd" does not have the same "we are concerned about long-term problems" look that was present on the 2007 chart above, telling us to keep an open mind about better than expected outcomes in the weeks and months ahead.
MARKET IS CONCERNED ABOUT A TRADE WAR
The trading range we have been covering for weeks is indicative of a market that remains concerned a protracted trade war could eventually lead to a recession and/or bear market. However, the fact that stocks (a) have not exceeded the February low and (b) remain inside the range, tells us the market also remains open to a resolution that will allow for a resumption of the primary trend. In short, the market has not made up its mind as to the severity and potential impact of the trade dispute between the United States and China.
THE PRIMARY TREND REMAINS POSITIVE - FOR NOW
Has the market flipped into a downtrend, even on the most basic level? This week's video answers that question in a logical and unemotional manner. The video also covers a fundamental checklist for bear markets, historical returns after the S&P 500 drops below its 200-day moving average, and two key market areas investors and traders tend to greatly underestimate.
“Groups are remarkably intelligent and are often smarter than the smartest people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart. Even if most of the people within a group are not especially well-informed or rational, it can still reach a collectively wise decision.”
TRADE WAR: BULL AND BEAR SCENARIOS
Markets remain perilously close to a trade-war point of bull/bear inflection. This week's video looks at two major scenarios: a bearish resolution and a bullish rebound.
Are We Hitting The Point Of Maximum Trade War Concern?
PRESS IS IN THE EYEBALL BUSINESS
Financial networks and websites are in the eyeballs and click business; not that there is anything wrong with that. The uncertainty related to a possible trade war between the United States and China is good for attracting eyeballs and generating clicks. Therefore, some of what has been written needs to be taken with a "what business are they in" grain of salt.
A PRUDENT LOOK AT BOTH ENDS OF THE TRADE SPECTRUM
Are there reasons to be concerned? Yes
Are there reasons to believe the worst may be behind us? Yes
CASE A: WE ARE NEARING THE PEAK OF FEAR ON THIS TOPIC
A rational argument can be made that Trump's tariffs are nothing more than a negotiating tactic to increase leverage when discussions begin with China. China's response to Trump's moves have basically the same "we will not be pushed around at the negotiating table " objective.
“Now listen to me. I am negotiating. Negotiation, this is what you do in business.”
A protracted trade war is not in either side's best interest. Tariffs, even the threat of tariffs, create numerous squeaky corporate wheels for Trump in the United States and for Xi Jinping in China. Nobody wants to deal with squeaky wheels for a protracted period; it can be very draining.
Trump is most likely looking for some way to declare victory or show some progress on the China trade topic before midterm ballots are cast. He has some specific objectives, including steel, aluminum, market access, and intellectual property; hence the need for proposing to enact several tariffs. China has simply responded in kind to maintain a powerful posture. Trump does not want this topic in the problem hopper when midterms arrive; China does not want to be perceived globally as anti-free trade.
Trump was fairly silent on this topic for a few days that were marked by wild swings in the financial markets. His April 4 tweet may mark the end of that silence and signify he wants to tone down the rhetoric and move closer to the negotiation/resolution phase. If that is the case, which is still to be determined, it is possible today marked peak news-cycle-fear on the trade war topic.
CASE B: EGOS COME INTO PLAY
We would like to think the leaders of the United States and China can exercise the proper self control going forward, allowing for an eventual shift away from a ping-pong game of tariff announcements and toward the negotiation/resolution phase.
Unfortunately, when power, egos, and politics are involved, anything can happen, including an escalation from a trade battle to a full-blown trade war. Therefore, while it is prudent to run through a few "what if" scenarios, we must remain flexible, disciplined, and open to all outcomes from an investment management perspective, which is exactly what we will do.