March 22, 2019

Two Strikes You’re In

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria"
- Sir John Templeton

The markets have spent the first 3 months of 2019 nearly erasing the entire decline of the last 3 months of 2019. In my opinion not nearly as surprising as it may seem. In the month preceding the final quarter of 2019 the economy saw a number of moderating signals from areas of the economy outside of employment. And while the markets were declining in moderation, moderated to the point of seeing increases in areas such as manufacturing, too subtle for the Fed to decide not to raise rates, but not too subtle for the broad markets. The ensuing rally in prices found its starting point.

These days pessimism needs very little incentive to rear its ugly head. In the last quarter of last year when the concerns of everything from yield curve behavior* to the challenges faced by Brexit and escalating trade tensions, the problem was not in the detail, in my opinion, but rather is the reticence of  the narrative to yield to the complex and incredibly ramified environment of global economics. It’s one of the reasons I have a slightly skewed faith in its predictive nature. So as the economy showed moderation, the Fed stepped back from rising rates and the heightened pessimism began to subside. Skepticism took us into the New Year.

The New Year began with the market higher and just as economic modulation turned around, trade issues looked more promising and corporate earnings were good. As the news kept coming in, without the usual distractions, the short memories of the bears began to buy into the rosier scenario. But has it really been that rosy? A lot of the rally has depended on good long term technical analysis that has shown promise. Likewise I can’t emphasis more the impact at this time of year of contributions to IRA’s and other qualified accounts in time of tax submission. And since the rise of jobs has included the first rise above 2.5% for personal income in over 10 years that impact of contributions could be bigger than usual, and it sure feels that way. Then over the past three months the employment data has moderated for the first time in two years. The resumption of economic expansion, particularly in housing, retail consumer activity and manufacturing and production, made the employment data benign. That’s why the next date for the employment update is Friday April 5th and between now and the Fed has already made it clear they do not intend to raise rates in the near term. If this all sounds too confusing to be optimistic over confusion is generally the partner of optimism, waiting for bad news to upset the relationship. In the end there is only the evidence needed to confirm that the moderation is temporary and not predictive of inevitable recession, which I don’t think it is, call me skeptical.

It’s possible we haven’t seen it yet. And that remains a good reason to part from the usual narrative professing clues to market declines, and above all I don’t see any reason why the markets would suddenly react to any of the day’s typical external distraction, such as politics. Without any legislation, I don’t care what happens in DC. The only thing to keep track of is the Fed, employment and consumer behavior, which for now is not disappointing.

The Interesting Factor
When the Fed first announced that they were going to not raise rates this year, the market took off in a flash. Why, I thought? If the Fed is going to stay easy, why is that good news! The Fed raises rates when the economy is going fast. So what does this mean to me? That the rally is not over and that opportunity for good value is still a worthwhile search. But defense is wise as well, and patience is important and once the “euphoria” comes into the game for real, the interesting factor is with all the good news the markets will go up and go down, such as they did today, and who is right, the investor or the market? I’m betting on the market.