November begins the period of being thankful for many things and leading up to weeks of holiday parties, high caloric intake, but importantly, we all wait to hear the sleigh bells ringing and wonder if we will see the annual Santa Claus rally (72% of the time) heading into year-end. Last year we took a detour as the Fed played Scrooge as they raised rates which disrupted the market and our mood, as the market tanked over -20%, from October to December. But this past November the market was thankful for the tariff truce with China, and that the Fed has taken their foot off the gas and decided to put interest rates on cruise control until next year. The S&P 500 was up 2.70% in November, and 3.40% with dividends. We encountered turmoil the previous six months where market returns ranged from -6.58% (total return – TR) in May, and up 6.89% (TR) in June, but we only averaged about 0.76% (TR) for the entire six months. But the last three months (Sept-Nov) we are averaging about 2.39% (TR). If we look at the terrific jobs report (+266K) last week, the stabilization of treasury yields, and a GDP hanging on to 2% with fervor, it confirms what we have been pointing out for the entire year, and that is, our economy is strong and especially when compared to other countries. If we combine our theme of a technological revolution with the strong economy, it gives us confidence that this bull market has more room to run. Of course, it’s difficult or practically impossible to foresee economic or market events in the next few years. But we can identify the major issues, which have not changed, and they continue to be the tariff war and interest rates. Obviously, we will need this truce to be maintained, and hopefully continue to pursue longer-term negotiations. This will take many months and even years to be solved. Interest rates if they maintain at this low level will continue to provide “cheap money” that can be borrowed. This is nirvana for the market heading into 2020, if we do get some growth in market earnings, as expected. Now we are not projecting rocket-ship returns as we saw this year, in 2020. We suspect market returns will be much more tepid, with a lot of volatility that we experienced this year. We suspect the year will continue into 2020 with a positive mood, but once the Super Tuesday votes come in, you will see the market to start digesting who the next President will be. It’s no secret that the market does not prefer a Warren or Sanders as it considers their policies as extreme and painful to U.S. corporations. The market is happier with Biden, Bloomberg, or even a Trump re-election that comes with soap-opera turmoil, that he brings to our lives daily. But the economy and market have maintained their strength since 2009, even under his tenure. We are not taking sides here but projecting market expectations. So, we expect the middle part of the year to be volatile as the leading candidates start to unfold. Once we get closer to the election it will become clearer how the market will react. We don’t see 25% returns again next year, although many investors and institutions were selling stocks most of this year as the tariff tirade from both sides was scaring them into bonds and cash.
Another important date is December 15th, which we touched upon in a recent report. President Trump called for new tariffs to take affect this weekend on many goods (ex: electronics) that consumers will begin to notice the higher price tags. There was a rumor this morning that they were placed on pause and the S&P futures went from negative to positive. We expect the tariffs to be paused, because China will not react well if they are put in place. Of course, it was a busy news day this morning, as the Democrats had back-to-back news conferences announcing that an impeachment vote was imminent next week, and within 30 minutes they were speaking about a “bipartisan” USMCA (ex: NAFTA) deal to be signed with the U.S., Canada and Mexico. We will restate that the impeachment process doesn’t concern the market as the House is expected to impeach the President and the Senate is almost guaranteed to not impeach him.
The U.S. consumer continues to feel confident as Black Friday and Cyber-Monday buying seemed very robust. We expect that to continue through the holidays. This does not mean that we are seeing a reversal of purchasing habits by consumers, as many retail brick-and-mortar stores will continue to decline as online shopping will not weaken, unless the consumer feels less positive about their finances. After personally walking into stores in the mall in the past month there is a clear difference in how traffic is moving, and it has nothing to do with sales, as huge discounts have been in place for many months. We still believe that the stores that missed the opening to adapt a better online experience will have a difficult time in reversing their downfall as thousands of stores will continue to close next year, as technology continues to make online shopping easier. We are now seeing malls either re-shifting their original focus of how they intended to use square footage, or targeting the “mall experience” towards teens who are more likely to visit a mall than their millennial brethren. The unique retailers will continue to survive. The “A” malls will survive. The malls in smaller areas with no big tenants will continue to weaken.
Looking into the year-end, its possible we might see some FOMO once we get past the Dec. 15th deadline. Of course, FOMO is the “fear-of-missing-out” as investors who felt panic during the year jump in to grab last minute purchases in stocks. It will all depend if we see a lot of gains being taken (selling) if investors feel uncomfortable going into 2020 with their positions in place. But investors are definitely heading into 2020 looking at different options if we get a hike in capital gains, or a Democrat that might want to incept a wealth tax. This should bring more normalized returns in the market, next year, which are closer to 10% or lower. We continue to believe that active positioning in individual companies will be more favorable. Its also likely that growth and value companies will share returns, but we still have faith that technology will be the most important sector. Obviously, you can forget everything I just stated if we get an unraveling of the trade talks. But we don’t expect that as Trump and Xi, both need a deal. The Fed will likely stay on the sidelines for most of the year. I can’t imagine they would hike as we get closer to the elections.
The market broke out of another trading range and we have seen this happen several times since the March 2009 bottom. We keep reaching new highs in the S&P 500 (currently at 3153). The first chart (A), below, shows the most recent resistance at 3025 that we broke through. The next chart (B) highlights that this pattern has occurred several times over the longest bull market we have ever experienced, since 2009. One can argue that these trading ranges or corrections, like late 2018, are re-adjustments to the market as we have not had a major event (dotcom bubble & financial crisis) like the last two recessions. This upward path with slowdowns where we have a period of volatility before we break resistance to a higher level could continue for several years. Longer-term, we are more concerned about the low interest rate environment that has enveloped the world, plus the dependence that central banks will always be there to save us. The bigger concern is this global strategy that we can just grow global debt to stratospheric levels with no concern. Here in the U.S. we are getting comfortable with a $1 trillion addition to our deficit on an annual basis, now, even as we have over $23 trillion in debt on the books.
Also, in Chart A, you will see a smaller chart showing the Rate of Change, or the volatility of returns. We can see there were wild swings in late 2018 and from May until October. But the range of returns has been shrinking proving there is less “knee-jerk” trading to immediate news and more confidence in the market.
CHART A: S&P 500 (Jan. 2018 – Nov. 2019)
Source: AETOLIA CAPITAL & KOYFIN
AETOLIA CAPITAL CHART B: S&P 500 (Mar. 2009 – Nov. 2019)
Source: AETOLIA CAPITAL & KOYFIN
Finally we are not implying that we are seeing a booming economy as most of the major developed nations are participating in a global slowdown. Our GDP is hovering around 2% and that is fine. But 2% is not recession territory. We might be in a more fragile position as an economy and a recession will eventually come. This is part of a natural economic cycle. The bearish pundits point to the fact that this is the longest recovery we have ever seen and so they tend to pop out of the woodwork at every downturn, but seem to hide as the market reaches new highs. We point to a low rate environment, with a Federal Reserve basically stating that they are not looking to raise rates even next year, which paves the path for our economy and the market to remain strong even with the lower GDP. Of course, we can't have our 10 yr. treasury yield headed lower and we don't want to see earnings to disappoint next year. Also, the big cloud over all of this will continue to be the tariff discussions with the presidential election becoming a stronger headwind as we get closer to the election.
If you have any questions or comments, please contact me.
John Anagnos Managing Principal Chief Investment Officer
AETOLIA CAPITAL LLC 3828 Kennett Pike Suite 212 Greenville, DE 19807 Office: 302-543-4446 Fax: 302-510-4166
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