While European and US markets are enjoying their Christmas meals with family and friends, right now it is 7 am on 26 December in Tokyo (5 pm Christmas Day in New York), and late Christmas night in London and Zurich, we have some bad news to deliver. Global equity markets are poised to continue what is, in terms of S&P 500, the worst month since the Great Depression. The views here at Classiarius do not sleep, as we are in Tokyo and work Japanese hours. Our partners sat down for Christmas and looked at a series of topics, with geopolitics and finance a core part of the conversations, and the outlook for January 2019 in markets is horrible.
The Fed is expected to hike twice in 2019 and this will result in some companies having problems servicing their debt, and downgrades will naturally materialize. Note that we at Classiarius are concerned about Germany, Iran and China. And the fears of Germany coming apart, with budget problems in France and Germany (two EU partners) causing an accelerated breakdown in EU relations.
The S&P 500, Nasdaq (deep concerns about Facebook) as well as the Dow which we suggested might be a target for short covering in our previous comments, 21,500 to 21,200, and all the stars line up against these indices. The Trump war with China, the US Fed and the hike cycle and the growing fear that the US and very likely China will both see a prolonged period of economic weakness with the US GDP rate falling to 1.0 to 2.0 percent and China approaching the 6.2 percent level. A global slowdown in GDP will likely hit the EM world hard with Brazil, Iran, Turkey and others falling into recession in the process. Iran is likely to start behaving in an aggressive manner in the coming 2 to 3 years as the regime falters. This is a geopolitical piece we will do in the coming weeks, I digress. But let us focus on the United States for now.
In the month of January, 2019, there are several points of focus. First look for levels to cover shorts in the Dow, Nasdaq and S&P 500. This task might be finished by mid-January. Second, start looking for oversold names or names that have falling 30 to 40 percent in recent months as possible entry targets. Also, be mindful of the shock waves that could move through Asia, especially Japan, South Korea and China. If the Chinese economy does falter, the fallout in Japan might quietly hit major exporters. Note we warned of both the US and China could fall into a period of weakness, thus smashing other markets.