I was on Fox Business today. Stuart Varney introduced me by asking me about my forecast for a Santa Claus rally–a year-end recovery in equities. From a technical perspective, I liked the fact that the S&P 500 successfully retested last month’s lows last week. I liked that last Friday’s price action was a bullish island bottom, with a gap lower opening followed by Monday’s gap higher opening.
In terms of sentiment, many investors were waiting for a pullback, and while the broader market did, a few high profile names kept the many of the benchmarks elevated. Those have corrected, and the sell-off uncovered new value opportunities. From a macro point of view, with the Leading Economic Indicators still rising, fiscal stimulus not yet run its course, and the real (adjusted for inflation) fed funds rate below zero, it is too soon to be looking for a recession, even though late-cycle evidence is accumulating.
I offer a review of Powell’s comments later but suffice for the moment to suggest that while stocks rallied and the dollar sold off, one of the most direct measures of Fed policy the fed funds futures strip had a considerably more benign reaction than the 2.3% rally in the S&P 500 and the 600 point advance in the Dow Jones Industrials. The implied yield of the December 2019 fed funds futures contract slipped half a basis point below last week’s low.
Varney and I briefly talked about trade and Trump and Xi’s dinner Saturday. I reiterated my
cynical pessimistic view that the most likely outcome is a resumption of structured talks like the last two US Presidents had. On trade, I simply do not see how China will make the concessions that the US demands. I do not see how Made in China is different from the import-substitution strategy that Trump folds into Make America Great Again. If the US were only interested in reducing the bilateral trade deficit, the agreement Mnuchin had previously negotiated would have formed the basis of a deal. In any event, the most likely scenario still seems to be increased trade tensions between the world’s two biggest economies.