US Markets Tracking 2020

By pjain      Published Dec. 11, 2019, 3:24 a.m. in blog Invest   

2020 Actionables

Park in BSV, JPST for 2.8% St income

JPMorgan Ultra-Short Income ETF (JPST)

Invests in diversified portfolio of short-term, U.S. dollar-denominated investment-grade fixed and floating-rate corporate and structured debt while actively managing credit and duration exposure. 30-day SEC yield of 2.81% with a duration of 0.51 years and competitively priced at 18bps. Captures 97% of the yield of Bloomberg Barclays Aggregate Bond Index with only 8% of the duration. In a flat to inverted yield curve environment, you are not being compensated to take on interest rate risk in the form of duration- you can use this ETF to play the short end of the curve and still collect an attractive yield. Provides a way to “be paid to wait” while equity and fixed income markets face headline volatility.

Expect volatility with little meltup or upside

EXPECT steep and swift retreats are growing more likely – like we saw in December and May.

Volatility to continue through September and perhaps October depending on where the president comes down on China

2020 Reelection Dominates - All's well!

  1. Fed has hinted at a more dovish tone leading to the possibility on 1 or 2 rate cuts this year. That leaves trade policy as the big driver for the markets.

  2. Trade and Tariffs is second Near term, the market wants to see forward momentum on China trade talks. Our view, which is the bullish view, is that a China trade deal will get done sometime this fall, and both sides will say it’s great. Tariffs will also come down, and there will be no more new tariffs or threats. We may have 1 or 2 rate cuts by then too.

  3. As a result, business confidence will pick back up, resulting in business investment and capital spending. This will lead to an acceleration in GDP in 2020; perfect timing for the election.

BTFD - Be OPPORTUNISTIC - keep cash handy - happens QUICKLY

Market timing is a sucker’s game.

We are in for bouts of volatility, both up and down. Stick to asset allocation and risk for clients and let them know that we are monitoring the economic and market levels very closely. We want to scale new cash and cash from sidelines in as the market approaches these levels.

Shift to Consumer Discount from Premium

The consumer needs to perceive value.

With high employment and wage growth, together with good consumer confidence, we’re still positive on consumer spending for discretionary goods, and believe the upcoming holiday season could see a 5% gain.

Stay on short-intermediate as NIRP will invert

In fixed income, avoid locking in rates for too long. Stay at the short to intermediate end of the curve for bond allocations, high quality.

Remain Widely Diversified

Global diversification is more important than ever – no one wins a trade war, but there are one-off winners and losers as supply chains are adapted to help manage cost. For example, soybean tariffs hurt US farmers but helped Brazilian farmers.

Hard to BTFD when everyone wants a redo of Dec'18-Jan'19 crash

Timing the 2020 Market - 2800 strong support, 16.5x pe, EY=6%

Street estimate for '19 SPY earnings of $170 * 16.5x PE = 2805

Flat/Inverse Yield Curve => Recession coming in 2020 or 2021

  • However this won't happen immediately and that we have some time to take measured decisions.

Trade War is blah will take 2+ years - Trump will do deal before Nov'20

Tariff pressures haven't really hit companies or retailers or even manufacturers as biggest were delayed to save 2019 holiday season

The trade war could take some time to resolve. Based on what we’ve seen with NAFTA/USMCA, it took nearly 2 years to reach an agreement, and we’re still working to get the deal approved by Congress. We just recently reached an agreement to lift steel and aluminum tariffs on Mexico and Canada to help get the agreement ratified. For China, step 1 will be coming to an agreement. Step 2 will be addressing the tariffs that are already in place, which could drag out the timeframe. - Andy Kapyrin

Corporate debt becoming untenable => Buybacks slow down => Stocks stagnate

-ive Little Upside as Market valuations very high - Buffet % of GDP metric

We see broader markets near all time highs and volatility drifting down.

The market is being driven primarily by three variables: global trade/growth numbers, the productivity of US/China trade talks, and Fed actions. We believe the market (especially in the US) is already priced, assuming these factors will have neutral to positive outcomes in the near-term.

+ive Interest rates are low - EY6% at PE=16 vs 10yr T<2%

The gaping disparity in valuations between stocks (5.3% Op.Earn/4.7% A.R.Earn Yields) and bonds (1.68% Yield) will likely keep typical market downturns from becoming large magnitude (-20% to -50%) declines.

Global flight to safety is keeping a lid on rates. Reflection of sentiment and expectations for slower global growth going forward.

ETFs, Passive risk - goes up big, down big

JP Morgan reports 60% of equities are held in ETFs or index funds and another 20% is held in quantitative funds. This move to letting machines run your investments is scary, since it does not involve any fundamental research.

Contrarianism => We have continued to see a big move away for active management into passive management and that usually means the next wave will be in active management.

Roughly 70% of the trading on the NYSE is from ETF trading and computer-driven/programmatic trading (commonly referred to as “algos.”) While many hedge fund managers believe they have the secret sauce, in reality, many use similar factors and essentially trade trends. Think risk on and risk off. Certainly the inversion is one of those factors, weakness in financials, etc.

Black Swan Risks

2020 Economic Key Factors, Problems and Concerns

Oil supply Brent>$60 but Iran/disruptions in the Middle East

Any commodity price spikes could depress consumer demand

Downside in corporate earnings - stagnation after 2018 tax cut, '19 stagnant

Street estimate for '19 SPY earnings of $170 * 16.5x PE = 2805

-ive US GDP slowing down ~2.5% '19? Less in 2020

  • 2019 Q1 3.2%

+ive STRONG Jobs report Nov'19

Surveys point to steady or improving growth in the domestically oriented services sector as jobs remain plentiful and as rising wages give consumers the confidence to keep buying.

Though hiring may be slowing we take heart in the Milwaukee PMI which shows blue collar employment at an expansionary 57.0 versus white collar employment at 41.1. Blue collar employment is a leading indicator.

+ive Consumer is strong and rates are low - spending high

Falling interest rates may continue to favor spending over saving

The American consumer is two thirds of US GDP but 17% of the global economy. Their actions can cover over slower manufacturing (11%) of the economy for some time, though not forever.

US households are very healthy with rising real incomes and far lower debt and default levels for what you might expect this far into an expansion. This spending has helped offset falling business investment. Also, despite fears that 2019 earnings would show weakness, they have so far been resilient and surpassed the 2018 record level.

-ive Strong USD still hurting MNCs EPS - though tax cuts compensated in 2018

+ve Lower mortgages may boost housing

-ive CEO confidence waning (due to trade), lack of capex spending

Lack of investment that drives productivity 18-24 months out and improving productivity allows wages to grow without destroying corporate margins.
However some high quality companies are issuing debt to buy equipment

+ive Stock buybacks are continuing - good for stocks

AAPL is an example

Tariffs, Trade war fears totally discounted - not climbing a wall of worry!

2020 elections -> Trump keeping markets ==> THEN WHAT?? like 2020, 2008?

Fed Put over? signal no more cuts in 2020?

However the Fed says it is monitoring - could cut some more if turbulence.

ZIRP, NIRP global - Fed joins in

Marketing Tracking

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.


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