E Playoffs Ahead

The road to success is dotted with many tempting parking spaces – Will Rogers

The urge to get off the road and wait out the impeding storm has been in play since 2019 started. The FOMO (fear of missing out) was countered by the JOMO (joy of missing out) in December. Memories matter less today to markets than moods drive them, but both are in the playoffs of bulls and bears as asset markets face a heavy week ahead. The playoff to a bigger game and a bigger risk-reward crunches the odds for the investor like a linebacker. The sport analogy for NFL fans today in the race to the Super Bowl may be part of the psychology in the US as old school meets new school quarterbacks.  There is no one way to win a game and so too, the race for absolute returns finds many different mixes for risk and return in the race for profits.

For the world, playoffs happen all the time.The wall of worry was climbed again last week as China/US trade deal hopes rise even as growth falls. The positioning for equities, FX and rates looks cleaner now than in the bearish start to the year but the momentum higher will need something more in the tank than hope to propel it further.

In fact, the gloom over the last quarter has set into forecasts for 1Q leaving it harder to chase the market and believe in the price action. 1H2019 earnings estimates for the S&P 500 are now the lowest in four years, according to Factset. The bottom-up EPS estimate for the first half of 2019 (1H 2019) decreased by 4.5% (to $81.73 from $85.56) over the past three months. The price action up clashes with the mark down in earnings.  

There are other anomalies to consider, the FOMC pause in rate hikes versus a cut and the slowing of orders and confidence and the bounce up in 10-year yields against the probabilities of a FOMC rate hike in 2019. The weakness of survey data in Europe against the expectations of a soft-patch bounce back with German auto emissions, Italian political noises and French yellow-vest protests blamed. The optimism in commodities against the weakest growth in China in 28 years based on the hopes for stimulus plans to work again. The rally up in GBP against the worst vote outcome for a Prime Minister in the UK for over 100 years based on the hope for a Brexit delay and potentially reversal with another referendum.  

Markets are playing off fear and greed with the road to success ahead long and with miles to go before there is another gas station. The week ahead for markets isn’t likely to resolve the clashes of confidence and politics with much certainty like the US football games today. 

Question for the Week AheadWhat is the next wall of worry for investors to climb?  

The ability for markets to see greed beat fear rests on the list of worries below being fully priced and their outcomes to be better than expected. The WEF Davos global risk report for 2019 is a good place to start.  

The report sees increasing polarization, rising dependency on computer/internet, climate change, rising nationalist/populist politics, changing international governance rules and rising income/wealth disparity as key issues.

The week ahead will bring a host of international leaders and their speeches on these topics driving markets. It will also bring protests against Davos and the idea of globalization and the role that global corporatations and G20 leaders play in the rising disparity of rich and poor. Along with it we have the list of more immediate concerns – from UK Brexit to China growth to ECB and BOJ policy responses.

Brexit Plan

The floating of the idea that the UK/Ireland have a bilateral border deal was immediately squashed this weekend. The Irish foreign ministry said on Sunday there had not been “any official request for a bilateral treaty” to replace the backstop. A government spokesman insisted that such ideas would not be entertained.

China GDP

The news Monday on 4Q GDP is likely to confirm that China has seen its growth slow to 28-year lows. This is blamed on its population aging, the stall in productivity, the US/China trade disputes, the previous tightening of liquidity to battle credit bubbles and the Xi push for reform across the nation. Whether China can grow if US/China trade issues are resolved may be the key question for 2019. The IMF sees the switch from investment to consumption as being still too slow. 

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