Market Briefing For Jan. 2, 2020

An 'absence of fear'  is being cited by many market observers, and in a surprising sense, by too many technicians and analysts, as they look at the late 2019 behavior; and measure it 'as if' it were only the S&P.  

That's not to say there aren't stretched fundamentals; in the leadership area that's for sure. This has been a year of 'multiple expansion' more than growth of profits for even the momentum winners; not just most of the also-rans or laggards. It's hard to imagine a new year without more actual profitability; but few seem to imagine how diverse all this is.

If the downtrodden really catch up; if the China deal is more substantive than the naysayers suggest; if the Fed maintains a sort of neutrality; if there is no geopolitical hostile engagement; if the 10-year stays shy of 2.0%; well you see what I mean. There's an argument for onward and upward; but common sense suggests we be prepared for setbacks.  

Nevertheless the setbacks may be in the form of corrections and again shakeouts (we identified a couple in 2019 and are looking for another in the very near-term; but it can be shuffled around by the timing of China signing; which now looks to be January 15th or so). Hence it depends. If the conflict in Iraq expands (it matters since the actual 'protesters' were suppressed by Iraq security and the Hezbollah Shia radicals were allowed to assault our Embassy); if Oil prices shoot up; if North Korea gets antsy; again variables. If none of that intervenes; well, the beat goes on in an Election Year.  

In sum: most overworked asset classes have unattractive returns, or at least less attractive percentage prospects given what has occurred over the year just past. However that means greater selectivity and care; at the same time with an eye on credit markets, because most managed portfolios (or algorithms) won't be thinking in common sense; but base moves off trends in-force (or levels broken) or simply the 10-year as a for-instance. Meanwhile tension with Iraq/Iran can actually help sustain Oil prices; and that for now is more of a positive than negative (for Oil), at the same time we're more optimistic about WTI in 2020 anyway.   

This was a grand year for the S&P; a year of ignoring politics (not that they're unimportant; but so far were expected to be mostly noise..which won't be the case later in 2020); but not the Fed. And you just might be at an inflection point (not now but in a few months) where the growing economy meets revised ECB and ultimately Fed policies, and stocks do start to sniff that out; which is a good news on the economy might be a lesser stimulus for stocks; given that the market anticipated recovery in the now-over transition year, as I've often discussed. That however isn't to say some sectors can't advance while others cool their heels a bit.  

I'm well aware that some stalwart market veterans either retired; got ill (sadly) or burned their hedge funds so bad by excessive bearishness.. resulting in a perception that 'veterans' can't be right and that somehow this is an infantile stock market for dreamy-eyed millennials only. Hah!

It is no such thing. It required a recognition of credit markets and a Fed ready to inject liquidity as needed; of a 'different' sort of investing style; of the downside (consistency while it works) that the algorithmic-driven management brings (even as I disdain the approach; I appreciate what it does to the markets for better and for worse).

And common sense that if analysts tell us (as they have for over a year) that 'high wealth individuals' are all selling and out of the market; that's encouraging, not discouraging, as I noted. If truly big money were out of the market; they can complain and moan all they want; but they already sold. The next thing they'll do I said a year ago is buy; the only question is when. So they waited until this Fall to 'chase' S&P, in some cases for peer matching; and in some cases desperate. It makes some sectors very expensive; while others are looking attractive (Industrials, Oil, even banks a bit, and some biotech). That is a reason I have in-mind for now; a rotation as we've discussed and nuances of which are evolving.  

Bottom line: will it be as simple as a 'continuation pattern' in 2020. No, I really doubt that. Aside the signing with China (sell the news possibly; depends on how substantive the deal is) the S&P is pressing too high.  

Late Tues. night we learned that North Korea declared that Pyongyang is abandoning its moratoriums on nuclear and intercontinental ballistic missile tests, state media reported. Secretary Pompeo on CBS tonight says 'we hope' Chairman Kim would stick to his pledge; as we did with regard to heavy training with the South Koreans.  

And of course the ramping on tensions with Iraq, which by virtue of just standing aside let the rabble Hezbollah march on our Embassy. I took time to watch videos they took threatening to kill any employee of the Embassy they find. In this case President Trump is correct that these are pro-Iranian; what is omitted is that the militias that fought Isis with us were pro-Iran all along; and that many of the former police and army were Sunni, and had gone over to the ISIS side during the early fights. It's tough; but government in Baghdad has never really been 'our friend', and although reinforcing the Green Zone is exactly what must be done for the moment; Trump likely 'gets it' in this case that the sectarian split there isn't easily fixed. (We flew 100 US Marines there from Kuwait earlier; more on the way.)

On this New Year's we'll pray for the safety of our troops and diplomats, as there will not be another Benghazi debacle (shame on one group for already saying that).

It's important that one grasp the implications of 2020 being a phase within a new structure rather than simply stretching an old one. That are concerns though.) 

Now, as we go into 2020, the domestic political (later) and geopolitical global (possibly sooner) issues become potentially more disruptive for markets. Although ironically, if the current tension with Iran turns-into a serious fight, then Oil prices might pop well above this 60/bbl area that we looked for when others were so negative on Oil (and we demurred).