Euphoria Fades From The Market, But Marko Kolanovic Doesn't Fade From His Forecast

Since that time, Kolanovic and his team updated their thesis to include remarks by Fed Vice Chair Richard Clarida and Donald Trump, who has lambasted the Fed Chair for raising rates in a seemingly autopilot fashion.

I often tackle the task of fact-driven analysis, void of bias and focused on market fundamentals. It’s a difficult task given the job of the contending media headlines. In general, the media is an ad-revenue based business model in search of ever increasing readers, viewers and “clickers”. The news/headlines are often sensationalized to capture the most readers, viewers and clickers. More often than not, the news narrative tends to adopt the market direction, regardless of the facts and logic that are likely to conclude in the long run. I believe it should be the other way around; the news should be fact-driven and less sensationalized with thoughtful analysis. Throughout 2018, this has been an objective, not the objective, but an objective. I aim to deliver the facts and logical analysis. It’s proven a meaningful advantage with regards to factoring out emotion in favor of stable and disciplined investing strategies. The reason I point this out is largely because if investors simply tuned out the media through the highs and lows of the market this year, they would come to find the benchmark has risen roughly 6% on the year, even with all the volatility. Additionally, this was a recent focus of Kolanovic’s latest notes as he has taken on the media. The reasoning; clients have expressed concern.

According to Kolanovic, JPMorgan’s clients have been asking about “the recent uptick in news stories with negative market sentiment.” The Heisenberg explains it as follows:

“Marko attributes that phenomenon to a couple of factors, the first of which is the media chasing stories in order to “fit the recent price action.” In other words, equities are falling, credit spreads are widening, volatility is elevated, so there must be a story to tell and the media being in the story-telling business, they’re of course going to oblige. Kolanovic also suggests that managers who have underperformed are effectively attempting to justify that by conveying negative views. There are specialized websites that are consistently spreading misinformation on geopolitical, social, and market issues.”

It’s a fine line to walk between opinion-based and misinformation-based reporting and analysis. I've mentioned this on many occasions throughout the year. I've highlighted Clarity Financial, as representing those “sites” participating in the proliferation of misinformation. To be clear, misinformation can simply be a belief, a belief that what they are distributing in the media landscape is logical and/or accurate. But to the extent I've found, and on so many occasions, the omission of key facts and input data or the cherry picking of certain facts and input data with the omissions mentioned, there remains little doubt that they misinform the public.

Gluskin Sheff’s chief economist and strategist David Rosenberg is another of these pseudo-analysts that constantly calls for a market crash and promotes “bubblicious” warnings to capture media headlines.

His latest warning invites investors to consider that the Federal Reserve's balance sheet reduction, not rising interest rates, could have drastic implications for stocks. It’s not that this isn’t a logical headwind for equity price appreciation, but rather the only narrative ever offered from Rosenberg is one that concludes with a market crash. It’s the Rosenberg mantra year-after-year-after-year-after-year! With all that said, let’s take a look at the latest notes from Marko Kolanovich and his team.

“Many clients have asked us about the recent uptick in news stories with negative market sentiment. Our analyses suggest that most of the press (as well as many investors) are ‘trend following’ and fit the fundamental narrative to recent price action. There are other biases – e.g. managers that are underweight or trailing the broad market are more likely to convey negative views. There are specialized websites that are consistently spreading misinformation on geopolitical, social, and market issues. A number of sell-side firms forecasted an escalation of the trade war at the G20 meeting or a looming bear market, and are now defending those views. We think that some of the prominent negative macroeconomic views are entirely inconsistent – for instance, a view that in 2019 we will have a combined economic slowdown, rapid hiking by the Fed, and significant escalation of the trade war. This view has a simple logical mistake: these 3 events are not independent (higher likelihood of one, reduces the likelihood of the others).

We think that the G20 meeting brought significant progress in the US-China relationship and should be positive for the market going into year-end. We stated previously that US-China trade dynamics are largely driven by the US political cycle and performance of the US equity market. We believe, simply speaking, that the administration cannot afford a falling market, large trade related layoffs, and fleeing donors in a pre-election year. The trade war did not yield the desired political results in the US mid-term elections. It did not rally the lower-income and rural base, it crippled middle-income 401(k)s a month before voting, and it alienated the business community and wealthy political donors. After losing the House, the trade war is less likely to be escalated given the inability to pass new fiscal measures to counter an economic slowdown (last year’s fiscal stimulus is wearing off). We often hear that trade is an important economic issue with bi-partisan support. We would like to note that over the past 20 years, global trade was responsible for significant gains in the US economy, stock market, income and wealth of the US population. However, trade with China and the decline of certain US demographic segments can easily be cast into a populist political issue acceptable on both sides of the aisle. This was outlined by Peter Navarro himself in the 1990s while he was still a Democrat and a proponent of free trade. Moreover, some of the issues around trade with China have prejudicial/racial undertones. For example, last week on national television we heard disgraceful statements how the Chinese are ‘not capable of innovating’ and hence have to steal IP, or how proponents of free trade are part of ‘globalist elites’ conspiring against white blue collar workers, etc. Our view is that despite likely additional volatility and more ups and downs, the ill-conceived trade war with China is ending. Ironically, this may have been summarized by Larry Kudlow’s interview last week when he said: “...at the end of that rainbow is a pot of gold. You open up that pot and you have prosperity for the rest of the world, but you’ve got to get through that long rainbow.” We all know that there is no pot of gold at the end of a rainbow, and that searching for one is a misguided effort. To summarize, we expect the easing of trade tensions will be a significant positive for equity markets.

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