Immediately following our last missive on September 9, stocks experienced a burst higher. While stocks missed hitting an all time high on September 12 by a mere 16 points, we continue to believe stocks will achieve fresh all-time highs in the weeks to come. The recent weakness, we believe, is tied more to political rhetoric, trade negotiations and concerns over a global economic slowdown.
From a technical perspective, as long as the S&P 500 Index remains above the August low of 2,855 (the Index closed at 2,893 today), stocks remain in an uptrend and well off the 2,346 level they reached on Christmas Eve 2018. This is positive. If stocks break below this level, our optimism will need to be scrutinized. Even if stocks break below this level it does not necessarily mean a dramatic decline will follow. It would mean we need to sharpen our pencil and better understand what led to such weakness. Until this happens, we continue to be optimistic toward stocks.
We remind clients that, while it is easy to be fearful when the news flow is full of stories about trade war, impeachment, BREXIT and negative interest rates, our attention is directed toward less speculative data such as corporate profits, interest rates, unemployment, housing-related data, etc. These data points remain solid and offer a much brighter outlook than the headlines might suggest.
Just 12 months ago the “experts” were expecting the Federal Reserve to raise interest rates 4 times in 2019. Instead, we have already seen 2 interest rate CUTS with another one expected at the end of this month and maybe even 1 more before year end. So, it is possible we could see the exact OPPOSITE from the Federal Reserve than what was expected. So what?
Well, once the expectation of multiple rate hikes sank in for investors this time last year, stocks started to sell off….hard. While the severity of the sell-off took us by surprise, it was not surprising that stocks sagged in the face of the Federal Reserve raising rates. As the saying goes, “Don’t fight the Fed.”
Well, this year we have a Fed that has already cut rates twice with another one on the way for sure and one more as a possibility before year end. We believe it is highly unlikely to see a stock sell off this year that comes anywhere close to that of last year. The Federal Reserve lowering rates and increasing liquidity will keep risk assets, like stocks, buoyant.
As for the risks associated with the impeachment process, we have no further to look than the impeachment process that took place during President Clinton’s tenure. In the 12 months following the impeachment of President Clinton by the House of Representatives, stocks rallied 20%.
As for the trade war with China, we expect a drawn out process. We agree with the view that this is a new kind of Cold War. Having spent the beginning of my adult life being trained to fight Communists in the form of the Soviet Union, I find it fascinating that so many people do not see China as a communist country. To be clear, there is no reason to see the citizens of China as an “enemy” in the same way as we saw the Soviets. Fact is, I do not believe it was correct to see the citizens of the Soviet Union as the “enemy” either. However, what we must keep in mind is that the communist regime that controls China is as economically dangerous to the U.S.A. as that of the former Soviet Union. To be sure, this version of “Cold War” will be even less dangerous than the one waged between the U.S. and Soviet Union. No Doomsday Clock. No Fulda Gap. No proxy wars like Vietnam and Korea.
Regardless of anyone’s view of President Trump’s politics, we see him as a deal maker rather than an ideologue. This suggests to us that he is inclined to make a deal rather than hold the Chinese at bay until they cry mercy. A deal of some kind before next year’s election would most certainly help his chances at re-election. The stock market is, without a doubt,the main barometer he uses to measure success. A cooling of trade tensions will definitely lead to a rally in stocks, even if for a short period of time. We anticipate this to happen in the months to come, if not sooner.
Overall, we remain optimistic about the prospects for stocks. We think gold prices and oil prices will trend higher over the next year. The Dollar should remain strong as long-term interest rates turn high as the Federal Reserve does its best to “inflate” the economy. At times when the Dollar rallies, interest rates trend higher and stocks rally, the economy is healthy and unlikely to falter.
We remain vigilant and focused on protecting the precious capital of our clients. While we work hard to form an accurate opinion, we understand we can be wrong. Like John Maynard Keynes famously stated, “When events change, I change my mind. What do you do?”, we do the same.
Sincerely,
Kessler Investment Group, LLC