Once a month, on the Wednesday following the 15th of the month, I will put up a long term view of the market. This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend). In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.
GDP – The second estimate of Q3 GDP was +2.1%.
With the China trade war, we are seeing some slowing of economic growth in China, Asia, and Europe. So far, it is not a serious problem in the US, although clearly our economy has slowed and the ISM manufacturing sector purchasing managers index (PMI) is showing contraction. The much larger ISM non-manufacturing PMI continues to show growth.
Although the US and China have reached a Phase 1 trade deal, it is not known exactly what is in it, nor how much of a positive impact it will have on the US economy. Any impact will probably not be felt for 6 to 9 months.
The latest (Dec. 17) Atlanta Fed GDPNow estimate for Q4 GDP is +2.3%.
Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit to 2.6% in 2017 and 2.9% in 2018. 2019 will not be as high as the two previous years if we continue as expected.
This GDP number supports the assertion that the bull market continues.
Fed interest rates – The Fed cut the Funds rate by ¼% on 10/30, the third cut this year to the level of 1.5 – 1.75% (I call that 1.7 in the chart below). At the December meeting, the Fed left rates unchanged.
The Fed has managed to “un-invert” the yield curve by cutting short term interest rates. Longer term rates rose a bit after the August global recession scare. The Fed has indicated they will pause the interest rate cuts and observe what happens to the economy, so a few months of stability of rates is expected.
Fed policy supports the assertion that the long term bull market continues.
|Date||Fed Funds Rate||5 Year Treasury||10 Year Treasury||30 Year Treasury|
|Dec. 18, 2019||1.7||1.7||1.9||2.3|
|Nov. 20, 2019||1.7||1.6||1.7||2.2|
|Oct. 16, 2019||1.9||1.6||1.8||2.2|
|Sept 18, 2019||1.9||1.7||1.8||2.2|
|Aug 21, 2019||2.2||1.5||1.6||2.0|
|July 17, 2019||2.4||1.9||2.1||2.6|
|June 19, 2019||2.4||1.8||2.0||2.5|
|May 15, 2019||2.4||2.2||2.4||2.8|
|Apr 17, 2019||2.4||2.4||2.6||3.0|
|Mar 20, 2019||2.4||2.4||2.6||3.0|
|Feb 20, 2019||2.4||2.5||2.7||3.0|
|Jan 16, 2019||2.4||2.6||2.7||3.1|
|Dec 19, 2018||2.4||2.6||2.8||3.0|
|Nov 21, 2018||2.1||2.9||3.1||3.3|
|Oct 17, 2018||2.1||3.0||3.2||3.3|
|Sep 19, 2018||1.9||3.0||3.1||3.3|
|Aug 15, 2018||1.9||2.7||2.9||3.0|
|Jul 18, 2018||1.9||2.8||2.9||3.0|
PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 23.8, up from 23.1 last month. I used 4 quarters of earnings with the most recent being Q3 2019.
This metric is moderately elevated relative to my trimmed 30 year average of 19.
The stock market rose to record highs, while Q3 earnings are down marginally from the prior year, stretching valuation.
This indicator is supportive of the bull market since the valuation is not extreme.
S&P earnings – Factset projects that earnings for Q4 will be 1.3% below the year ago quarter, and that CY 2019 will have been flat on earnings. They project that Q1 will show earnings growth of 5% and Q2 will be +7%. Will that come to pass? I don’t know.
This indicator is neutral to the bull market. 2019 was a flat year for earnings, while market prices are up considerably, not a good combination.
Age of primary move, bull or bear market – The bull market is 10.7 years old, which is a long bull market by historical standards. In and of itself, this is meaningless. It does provide some perspective that one should keep in mind.
Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017). The US has ratcheted up pressure on Iran, sending a carrier group to the region (May 2019). Iran has begun attempts to disrupt oil shipments in the Persian Gulf and has begun to enrich uranium beyond the limits of the Nuclear Agreement that the US dropped out of, which is a destabilization to the region.
Robert Mueller has issued his report and no serious indictments came out after Roger Stone. The report was made public on 4/18/2019. This will be kept alive through the 2020 election in my opinion. If the House decides to impeach, it will put a drag on the stock market. A new threat to Trump’s presidency is the flap over Trump’s request that Ukraine investigate Hunter Biden’s board membership on a Ukrainian gas company, while withholding $400 million of military aid. President Trump was impeached by the House on December 18, 2019.
Trade wars are in effect with China and the EU. This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products to China. Growth is slowing in both Europe and China. This is already a small negative for the economy and if these are not fixed soon this can degrade and threaten the global economy. A Phase 1 trade deal was announced December 12th, but few details have been seen.
Anthony Scaramucci in the Republican Party has openly called on the party to discuss replacing Trump on the ticket for 2020 (August 2019). Trump’s poll numbers are very low, and if the republicans believe that Trump has no chance to win the presidency in 2020, they will move to replace him. This is very preliminary and it may not go anywhere, but it bears watching.
Boris Johnson, the new British prime minister, threatens to force England out of the EU on a “hard Brexit” if necessary. This will be temporarily disruptive to the markets until they figure out exactly what the implications of a hard Brexit really are, if it does occur (Sept. 2019).
Global geo-politics have degraded from supporting of the bull market to neutral.
The market has been slowly rising to near daily record highs based on optimism for a Phase 1 trade deal with China, and the deal reportedly defers the new tariffs that were set to take effect on Dec. 15.
Technically, the long term market condition has improved slightly this month. RSI at the top of the chart is 69 and rising, which is positive and not overbought yet on the long term basis. Momentum shown by MACD at the bottom of the chart is rising mildly, a positive. The price action is positive in a four month upswing. The long term chart looks very good.
Currently there is nothing to overturn the thesis that the long term bull market remains in effect. The price remains in the channel this bull market has been in for the last 10 years.
The market’s technical indicators support the thesis that the long term bull market remains in force.
The stock market remains in a long term bull market technically, and there is nothing in the general economy, market valuation, in Fed policy, or in the global geo-political realm to overturn that conclusion.
Two of the long term indicators, earnings and geo-political, have been downgraded from “supportive” of the long term bull market to “neutral”. The long term bull market continues, but it is no longer the vibrant and almost risk free market of a few years ago.
Long Term Issues to Keep in Mind:
Federal Deficit: (Negative – Noted Jan. 2018) It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts. This has not been shown to work in the past. The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.
The total national debt exceeds $23 Trillion (late 2019), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit. If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad. The thing saving us today is how poorly all the other nations are managing their economies.
Rich Comeau, Rich Investing