There continues to be a war between the corrective market action and the more bullish economic outlook seen by most economists. This is one of those times when the fundamentals are completely being ignored as the market is trending more on the technical picture and the news of the day. We are testing the October lows and if it holds we could see the typical v-bottom and a strong rally off the lows. The market may be range bound between S&P500 2600 and 2800 until some of the uncertainties fade. From a pure technical perspective, if we do not hold the October lows we could see more volatility short term. However, based on the fundamental outlook for continued earnings growth and current market valuation, we remain bullish and believe that market will rebound in time.
Bear markets are generally caused by one or more of three things; a sign of a recession on the horizon, inflation or a hostile Fed. None of these are apparent now. Growth may slow some in 2019 which was predictable as the tax cut bump fads but, positive earnings growth is expected. Inflation is tame and even moderating some and, the Federal Reserve commentary has become a more accommodative lately. Many market pundits now believe we may be “one and done” in terms of further tightening. In other words, a December rate hike and then a pause while the Fed watches the data without any pre-determined interest rate movement.
Corrections are never fun but emotional decisions generally always end up being just that. Patience will be rewarded as focus on the overriding fundamentals will return in time. Bull markets end during a time of excess and euphoria. Neither of those is in evidence now. The valuation of the market is currently at about 15x earnings which is about average over the last 50-60 years. During this time, the average 10 year Treasury bond traded at interest rates over twice the current rate of less than 3%.
Another uncertainty is trade. The administration is playing hard ball right now but, this too will be in the rear view mirror soon. Keep in mind that all other countries need the American consumer and we believe trade deals will be made that ultimately improve our trade position.
Stay patient and we will keep you informed.