The Market Is at War With Itself

Markets are anxious… uncertain… confused — like an infield during a bunt, to quote E.B. White.

Drawn in one direction by trade wars, sent the other way by tax cuts and record stock buybacks, which way do markets turn next?

Today we declare the answer, an answer guaranteed to be correct — lest the heavens fall.

First the news…

Over 80% of fund managers list trade war as their largest concern — according to a recent Bank of America Merrill Lynch survey.

In this camp we find Kristina Hooper, Invesco’s chief global market strategist:

There will be a lot of collateral damage from tariffs and some of the negative impact is already showing up in sentiment or soft data, even if we don’t see it in hard data yet.

We are reliably informed, for example (MarketWatch), that businesses are not expanding because of higher input costs — due largely to steel and lumber tariffs.

On the other hand — and when isn’t there the other hand…

We are told that tax cuts are spreading expanding ripples of growth throughout the economy.

We are further told that unemployment scarcely has existence.

And FactSet reports that 87% of S&P companies reporting earnings so far this quarter have exceeded profit estimates.

In nuce:

Trade war pulls on stocks. Official economic data, corporate earnings, push stocks forward.

Again, which side wins?

Almost six months have lapsed since this year’s “correction.”

History reveals that markets often recover their entire losses six months following correction.

But this market still wallows in what can best be labelled a sideways grind.

Each attempt to recapture the January heights has come to grief… and ended in  disappointment.

One day’s gains are cancelled by the next day’s losses  — and vice versa.

On it goes.

Meantime, the bulk of the market’s gains this year owe to roughly one dozen technology stocks.

This “lack of breadth” leaves the market vulnerable to a tumble.

Remove that supportive crutch… and what holds it up?

Thus we find the bears — the reinvigorated bears — aprowl.


Momentum has been unimpressive for six months since the peak, and it’s allowing the skeptics to pick apart the market on technical and style points.

What might these technical and style points be?:

Groups [of stocks] that are supposed to be bellwethers such as transportation, financial and industrial stocks are lagging conspicuously, which has started a sort of vigil for a market top in some corners of Wall Street.

If stocks are to mount an assault on January’s highs, goes the theory, they must recapture the momentum that stalled six months ago.

“For that to happen,” argues Forbes contributor John Tobey:

The Dow averages (both industrials and transports) need to get going. If both can rise to new highs, the… scare will become history. However, if the stock market continues to meander, the downside alarms will remain primed.

Both Dow industrials and transports indicate the market is still uptrending — but the signal is weak.

Meantime, the Federal Reserve is exerting its own negative tug on stocks.

It is increasing interest rates… and decreasing its balance sheet.

Does the foregoing mean you should cast your lot with the bears?

This bull market, says Bloomberg “has been derided as fake, doomed and history’s most-hated.”

But that perceived weakness may ironically be its greatest strength.

It is when markets are at dizzied heights that we panic most.

Bad news has kept fear in its saddle… euphoria in its cage… and the bull in charge…

It’s a trade war, you say? Good, good.

The Federal Reserve is raising interest rates? Even better.

Mr. Joseph Average Investor fears a crash? Music to my very ears.

Besides, pullbacks are healthy — and more than equal to any short-term hell they raise.

They shake out “weak hands.”

Cassandras have wailed impending doom for years and years (surely not us!).

And despite this year’s correction, no crash has come issuing.

As Jim Rickards reminds:

Bubbles can last far longer than the critics expect. Alan Greenspan famously called the stock market a bubble in 1996 in his “irrational exuberance” speech. He was right, but he was also three years early.

And so we return to the question of the hour… and our guaranteed prediction:

“Drawn in one direction by trade wars, sent the other way by tax cuts and record stock buybacks, which way do markets turn next?”

The answer, etched in hardest granite:

Markets will rise — or fall. Perhaps both. Or neither.

And that you can take straight to the bank…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning