Lowering the Bar
Posted on Sunday, October 27th, 2019
The past two weeks have been filled with earnings reports, trade deal rumors and central bankers making speeches. While earnings reports have stepped over lowered bars for success earnings are still down 5-10% year over year which at presently elevated valuations should have been a bit more painful that it has been. Given that, the internals of the market are showing promise. Small cap stocks and transports here in the US are showing some strength while Europe and Japan are showing signs that they could be breaking out to higher levels. A rotation out of US high growth stocks being exchanged for value and assets flowing to a much cheaper European and Japanese markets makes sense in light of the high valuations here in the US. There even seems to be a possible bid for emerging markets given weakness in the US dollar. These rotations could make a plea for some investing capital. Our major concern is still the year end liquidity issues that seem to pop up every year around this time.
US financial stocks have shown some bounce in their step in recent days as well. Market bellwether JP Morgan is now at new highs. Further signs of a positive breakout in JP Morgan’s stock could pull money off of the sidelines and into equities. This is the strongest part of the year seasonally for stocks and investors don’t want to get left behind. The November to May time period has offered all of the gains in stocks going back several decades. The May to November time period (Sell in May and Go Away) has offered none.
While we fear a recession on the horizon we have more respect at the moment for the year end liquidity issues. Our big question right now is about the recent issues in the overnight money markets. Is what we are seeing simply liquidity issues in the repo market or is there a bank that is in trouble that no one wants to lend to? We shall see but for now we see a US President that wants to get elected hammering out a trade deal with China to boost markets further. This all while central bankers have opened up the monetary spigots in light of trade issues and slowing economy. Once he signs a trade deal with the monetary policy heroin flowing the economy should bounce. That is the pain trade anyway.
It seems as though we are still in the midst of bear markets rolling from one sector to another. Tech earnings went stagnant two years ago. Since then it has been all about the buybacks. It might be tech and high growth stocks turn in the bear camp next with perhaps financials as the beneficiary. Investors see the signs of recession right around the corner and have lightened up on risk yet the market refuses to yield. The trading range on the small caps and transports in the US is getting tighter and ready to break one way or the other. Gold is holding its own and digesting its gains. Europe and Japan, while stuck in the mud economically, are seeing some positive action in their markets. The US Dollar may be the next key. If the Dollar begins to fall that would help a host of assets that investors would then turn to.
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.