January 19, 2019
Weekly Market CommentaryThe combination of better-than-expected economic data, encouraging corporate earnings from U.S. banks, and the signing of the “phase-one” trade agreement pushed U.S. stocks to fresh record highs last week. Strong U.S. retail sales and a surge in U.S. housing starts point to a resilient consumer supported by the health of the labor market. The long-awaited “phase-one” trade agreement between the U.S. and China was formally signed last week, largely meeting expectations. Specific terms included commitments from China to increase purchases by $200 billion over the next two years ($78 billion of manufactured goods, $52 billion in energy, $32 billion of agricultural products, and $38 billion in services). We believe that the agreement removes some uncertainty, but trade issues will likely remain a source of volatility in the year ahead. Stock market performance was again quite erratic this past week – the S&P 500 rose 1.9%, the Nasdaq gained 2.3%, European bourses advanced 1%, Japan was flat, the Shanghai Composite lost 1%, and your BSD Global Tech Hedge Fund was up 0.8%. We think an uptick in volatility, and a short-term pullback, is a reasonable expectation. However, we don’t think pullbacks will give way to a bear market, as the conditions that are historically associated with a bear market are not in place.
Earnings could be the biggest driver for stocks in the week ahead, as big tech, financial, consumer and industrial companies report. Just a few dozen S&P 500 companies report in the four-day trading week, including IBM Tuesday and Intel on Thursday. Johnson & Johnson reports Wednesday; Proctor & Gamble is Thursday, and American Express releases results Friday. The U.S. stock market is closed Monday for the Martin Luther King holiday. President Trump travels to Davos, Switzerland for the World Economic Forum, where he speaks Tuesday. With the China trade deal signed this past Wednesday, strategists say they are now watching for any signs of a bigger trade row brewing between the U.S. and Europe. There are a few U.S. economic reports, including existing home sales Wednesday; leading economic indicators Thursday, and then Asian, European and U.S. PMI data for manufacturing and services on Friday. Your BSD Global Tech Hedge Fund continues to ride this “blow-off top” stock market rally, while holding a 50% hedge on the underlying invested stock portfolio of tech leaders, which will start as a good platform from which to build when the eventual pullback occurs. Bank Of America’s prediction on Friday summarizes our expectations: “[We’re staying] irrationally bullish until peak positioning and peak liquidity incite a spike in bond yields and a 4-8% equity correction.”