While we are still receiving signals that the US stock market will face challenges in the first half of 2019, there are some investors who are still bullish.
We at Classiarius see the S&P 500 earnings slowdown in the first half of the year as a concern, especially since the first have of 2018, driven by the tax cut, these earnings were surely a stand out in market support. When they vanish, investors notice. But there are still other factors such as the potential for a China economic slowdown in 2019 which is now a greater concern as trade talks are not moving forward as Mr Trump and Mr Xi had anticipated, and the increasing risk of the European Union falling into recession may become a central factor. Also there have been new threats in Asia, as Japan and South Korea have been in deep disagreement on military and economic issues. No one is talking about this now but Japan and South Korea are engaging in verbal insults and battles.
In our view, negative geopolitical inputs could add to the drag in equity markets in 2019. So in the coming weeks, from March 1 to March 15, we think that the January rally with indices in Europe and the US moving higher by 9% to 18% could be a chance to express bearish views. A massive rally in January turns into a sell-off in March, sure this seems logical in the very least. Again, there is talk of President Trump extending the time limit in the China trade discussions. But this does not change our view, as we believe the problems in China – trade problems are structural – will take 5 to 10 years to change.
Still, it is worth noting that in recent years the US firms that have outperformed the greater market were those with high exposure to overseas sales. One would think a weaker US dollar and added China stimulus are needed for a continued rally in US equity, but will it come? Clearly the February and March period will be a turning point for US equity markets. These markets may trade flat, making it difficult for directional trades on the index but likely easier for those who are clever stop pickers.
We will be adding to these stories in the coming weeks and months.