Outlook for 2019

Happy New Year! 2018 is in the books and the recent turn in markets made it a year to forget for most investors. Q4 saw the much-expected & needed correction in US equities. While the investors seem to be breathing a sigh of relief and jumping back into the market, I am not convinced that this is the end of the correction and expect the downtrend to continue.

Here are the reasons why I continue to be bearish:

The US economy just went through 9 consecutive quarters of growth and the rate of growth is now tapering off. More importantly, most companies had record operating margins when they were hitting their respective all-time high stock prices. So, when you simply look at a short-hand financial number like P/E ratio, keep in mind that the margins are baked into the numbers — which is why you cannot base your full investment decision simply based on one number. Add to that revenue growth has plateaued for companies in this cycle and wage growth has consistently increasing month after month. Even though the Fed doesn’t see a recession coming (they never do), that recipe smells like a upcoming recession to anyone looking at the data objectively.

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Outlook for December 2018

As the year 2018 winds down, the markets keep turning more volatile (and interesting). After a decline in October, things seemed to stabilize a bit in November, but still remained sluggish. The big surprise was the change in tone from Fed chair Powell a few days ago, which hinted that they may be at the end of the cycle for raising interest rates. While it was not explicitly stated or clear in any certain way, the US market rallied ferociously as investors started panic buying. This change in direction & the amount of movement from the largest stock market in the world, based on interpretation of 2-3 words from one person (albeit the Fed chair), shows how broken the system is.

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Outlook for November 2018

October turned out to be one scary month for a lot of investors. Most portfolios took a haircut with the broad market taking a plunge. Almost half of the S&P 500 stocks are in bear market territory now, having fallen more than 20%. I am now waiting for the other shoe to drop. When you have a handful of stocks (the big 5 tech stocks) making more than 15% of world’s largest financial market, nothing good can come from it. I’ve been highlighting this for the last year or so and finally the tide is turning with the major tech stocks plunging in October.

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Outlook for October 2018

The Fed has gone ahead and raised rates again. As rates continue to rise, investors have to wonder which one of these raises will finally go past the tipping point for the market? With the ongoing EM crisis, other developed markets absolutely hated, and the US$ being loved and given a bullish rating on everyone, it is pretty interesting to note that the DXY has not cracked past 97 so far this year. There are some signs that the DXY top is already in for this cycle, but some other signs that indicate that it could go a bit higher — depends on which data points you look at. I remain weary and neutral on it while maintaining defensive positions.

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Outlook for September 2018

Summer is almost over, and things are getting very interesting in the global financial markets. The talk of town is the start of EM currency crisis. August saw the spectacular fall of Turkish Lira and with it, the Turkish markets. While the media played it as a local event that would not effect the global markets, that tone shifted very quickly, as other EM currencies started falling — Argentinian Pesos, Indian Rupees, South African Rand, Brazilian Real all took a pounding in the last few weeks of summer. Not only the EM contagion is starting to play out, but also developed markets look precarious — with Euro trending down, British pound heading down; Aussie dollar and Canadian dollar are starting to show weakness too thanks to the housing bubbles — anyone and everyone you talk to, advises running to the safety of the almighty US dollar. With everyone piling on one side of the trade, it doesn’t take much of an imagination to figure out what happens after this crisis plays out…

Add to the fact the ongoing tariff war crusade initiated by the US administration. While the initial winner seems to be the US (and the US$) most international trading partners, including its closest allies, have indicated being treated unjustly and looking for alternatives. If history teaches us anything, tariff wars almost always never turn out as originally intended, so it will be interesting to see how the bureaucrats maneuver the upcoming minefield.

So, in just matter of months, we have gone from a narrative of “coordinated global growth” to “EM crisis/global contraction”.

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