The news flow has finally begun to weigh on equity markets. Concern is building that President Trump is damaged (self-inflicted or not) and will not have the political capital to push through any of the reforms he promised. He seems to have lost the support of corporate CEO’s who he could point everyone to as supporters of his job-creating messages.
Does this mean the market is doomed and a crash is imminent? We think a crash is the least likely scenario to play out but weakness is coming.
As our clients and friends know, we do not bring a political bias to the management of our clients’ investment portfolios. Our job is to make decisions that contribute to positive returns or diminish negative returns. Period. Allowing our emotions or political bias to permeate the decision process would lead to poor decisions. Decisions clouded by emotion and the news cycle.
The underpinnings of the economy remain very strong. Interest rates are rising yet remain historically low. This keeps the cost of capital for expansion low while enticing corporations to deploy the capital versus let it sit idle earning a zero return.
Negative sentiment, vis a vi the news cycle referenced above, keeps investors from becoming complacent and, therefore, fully invested.
Corporate earnings, sans the retail sector, continue to come in very strong and above expectations.
However, we do detect some chinks in the armor of the market that may impact it over the short term. These chinks are appearing at the weakest time on the calendar. September and August are the two weakest months of the year. They are holding true to form three weeks into this eight week period.
Friday’s price action in equities lead us to believe a continuation of weakness in the market will persist for a while longer. Despite a rally following the announcement of Stephen Bannon’s departure as the President’s chief strategist, market’s ended near the low of the day. This is pretty ugly price action and suggests more weakness lies ahead.
Our managed accounts remain cash-heavy and therefore in a solid position to take advantage of the weakness ahead. We remain bullish and believe the major equity indices will trade higher by the end of the year. Therefore, we anticipate being fully invested by the end of September. We even expect a tax reform package to get passed which would ignite the market and push it higher.
So, expect to read about stock market weakness in the days and weeks to come. Also, expect all the doomsday predictions to capture headlines. Steel yourself against the temptation to join the chorus of naysayers. Stocks are poised to trade higher once the storm passes.
Kessler Investment Group, LLC