US Markets Tracking 2019

By pjain      Published July 31, 2020, 8:45 p.m. in blog Invest   

=== 2019 Macros

2019 +15% YTD

The market is up about 15% YTD, but most of this return is simply correcting the overdone downturn in the 4th quarter. So, while it is likely that the bulk of returns in 2019 have already been captured, it is not at all unreasonable that, with current supports, investors should capture additional returns during the remainder of the year. We want to remain invested broadly across equity markets but will pare back equities if portfolios are too underweight to cash and fixed income assets. Because of the risks outlined above, we expect volatility to increase from its levels earlier this year.

r MktLog

US Economy

Trade Wars, Intl, China

LT: Cyber-Insecurity - billions in losses

Iran and China’s leaders' response to U.S. containment efforts may take the form of cyberwarfare.

US and Israel have world-beating cyberwarfare capabilities. US cyberattacks against the four rivals will continue to intensify this year, raising the risk of the first-ever cyber world war and massive economic, financial, and political disorder.

Japan and RoW join China unwinding US Treasuries

Dumping US Treasuries would impede China’s economic growth if dollar assets were sold and converted back into renminbi (which would appreciate).

However major countries ARE boosting gold while dumping USD Treasuries. If sell-off scenario accelerates, the capital gains on gold would compensate for any loss incurred from dumping US Treasuries, whose yields would spike as their market price and value fell.

It could trigger a shock in the US Treasuries market, possibly leading to a sharp economic slowdown in the US if government keeps burning 1.2T/year in deficit as well as huge trade deficits without foreigners buying?

How can Fed monetize US Fiscal deficit

How long can Fed just print money? Is it same as "real" investors or foreigners?

ACT: Gold accumulation instead of keeping trade surplus in USD

China could diversify its reserves by converting them into another liquid asset that is less vulnerable to US primary or secondary sanctions, namely gold.

Germany, mid-East, China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.

LT: Digital Currencies, and alternate to Petrodollar/USD denominated trade

  • Digital currencies help regimes better track internal populations - able to track or block funds to opposition
  • Externally they can buy/sell with this instead of the USD fund flows controlled by NY Clearance, SWIFT,etc.
  • Cash management becomes far easier - as most paper currencies

    Venezuela in response to sanctions has its own digital currency Petros. China-Russia-Iran collaborating on swapping their imports/exports outside of USD or even ships/insurance

GEO: No China trade war, Iran beaten

China "resolved" not solved

  1. China's signed the first-step agreement between the world’s two largest economies and promised to purchase some $200 billion of American goods over two years and to make changes to its intellectual property and technology rules.

  2. However, while no new tariffs will be added, neither will prior ones be removed.

  3. Phase Two trade deal won’t be reached. so China’s ability to acquire intellectual property isn’t capped. This will lead to an erosion of the economic co-dependence between the U.S. and China.

  4. Big tech AND EU/US industry will be hurt most as decoupling will occur. Separate standards for 5G and other tech hardware will be bad news for the future of world economies.

  5. China will seek global markets using its BRI esp. Africa, and then start cutting imports from other countries first, then even USA down the road.

Iran cowed on response - oil unlikely to spike

  • ”killing of the top Iranian general at the Baghdad airport on Jan. 3. Oil prices gained more than 3% with analysts saying that Iran’s chosen method of retaliation would determine the next move for oil.
  • Iran fired missiles at bases in Iraq housing U.S. troops
  • Later traders appeared to be less concerned, and oil gave back a more than 2% gain to settle little changed, even spending some time in negative territory.
  • Trump’s claimed that Iran “appears to be standing down,

1. Economy Performance - stumble possible, but no recession

In 2020 a recession will be avoided, but that economic growth will fall short of estimates. This will prompt the Federal Reserve to slash interest rates twice by a quarter point (or one big cut) to 1%, down from the current range of 1.5% to 1.75%. -- Byron Wien of Blackstone Jan 2020 prediction

In an effort to boost the economy, President Trump will use “every executive authority he has to stimulate growth,” which includes cutting payroll taxes. Trump will also put huge pressure on Fed - resulting in cuts RAPIDO .. so to keep market up till Oct'20.

RATES: Fed passive - Supportive - No rate rises - insurance cuts if Economy stumbles

Fed will cut interest rates twice and the S&P 500 will rebound to an all-time high despite an increase in market volatility, - Byron Wein Blackstone

Byron Wien of Blackstone predicts that the yield on the 10-year treasury will approach 2.5%, and that the yield curve will steepen. This is a widely followed metric on the Street, since recessions are typically preceded by a steepening of the yield curve.

2. Corporate Earnings flat but market doesn't expect "problems"

At the end of 2020, the S&P 500 will likely trade off anticipated FORWARD earnings in 2021.

Corporate Earnings per share (EPS) expected to rise by 6% in 2020 and 5% in 2021, according to Goldman’s 2020 U.S. Equity Outlook report. - Blackstone's Wien predicts that earnings being on track, or coming in better than expected, would boost the market.

3. PE Valuations and Sentiment

Valuations rising Q1'2020

  • The Trailing PE for a few recent years are
Year Jan 1st PE trailing
2020 25 * est
2019 19.6
2018 25
2017 23.6
2016 22
2015 20
2014 18
2013 17
2012 15
2011 16.3
2010 20.7 * Recession
2009 71 - then it fell massively by March'09
2008 21.5
2007 17.4
2005 20
2003 31.4
2001 27.6
2000 29
1999 33
1998 24.3
1996 18
1992 26 * Recession

4. What will SPY look forward - OUR TAKE

  • Most sell-side TV-types projecting average S&P at 3,300 by end 2020 or 7% up for the year.
  • Big tech is rising RAPIDLY - but rest is stagnant!

5. High Volatility - Go up high in H1 and then fall before going up by end of year/election

  • Volatility will increase and there will be “several market corrections greater than 5% throughout the year.” Wien predicts that the S&P 500 will top 3,500 for the first time — around 8% higher than where the index currently trades — but volatility will increase and there will be “several market corrections greater than 5% throughout the year.” - Byron Wien, Blackstone

  • The bulk of that will be rising in Q1 of 2020.


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