Trump Slump
Posted on Sunday, August 18th, 2019
We see a stock market that is either in denial or one that fully anticipates that the Federal Reserve is prepared to embark on the next round of QE. It does appear that the Fed will act it is just a matter of when. Will they let the market fall first before they act? That is the safer path. For now, the stock market defies gravity while bond yields tumble. While we would expect stocks to follow the path of bond yields here and head lower, we see a stock market stuck in neutral between 2830 and 2960 (we are currently at 2888, right in the middle of the interim range) on the S&P 500. Above 2960 momentum buyers may come flooding in. Conversely, below 2830 the 2800 level (and 200 DMA) looms large. Any breech here and algorithmic selling will take over. When in doubt we defer to the bond market and lower yields have us looking for lower stocks.
We are positioned defensively and would not mind lower equity prices. We see the calendar having an outsized effect on returns here. We could see a liquidity squeeze (and downward pressure on stocks) as we approach the last quarter of the year while professional investors look to protect gains. For now the S&P 500 should still be considered range bound between 2550-3000 with the 200 Day Moving Average looming as critical support at 2799.
The politics of being the Federal Reserve chair are even more intense this year. A recession and stock market fall could doom a Trump second term. The President has been on the Fed pretty good and is looking to set them up for the blame. It won’t work. Inflation is also starting to ramp up as tariffs begin to take their toll. A shopping trip to Wal-Mart costs 5% more than it did last June. America is Wal-Mart Nation. A fall in stocks and a rise in inflation would doom Trump. How willing is Mr. Powell willing to help out President Trump? That may be the key to investing in late 2019 and early 2020. Powell’s speech from Jackson Hole next week should be a real market mover. Since Powell took over his speeches have not been well received by Wall Street as the market has fallen more often than not.
The Fed may restart QE in the face of year end liquidity pressures. That would send stocks higher. Would the Fed do that with stocks at all time highs or will they let stocks falter first? We think that they should wait but don’t think they will. August, September and October are not the best months for the market historically. We continue to position defensively. We are favoring solid dividend paying stocks that have higher momentum and we have been buying gold while avoiding banks like the plague. Gold has had a good run and so have bonds. Caution should be paid there.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.