2019 finished with a great bang! The President achieved his goal of lower interest rate in 2019. At the height of the stressful time of the trade war negotiation, the Fed stepped in to lower interest rate three times in 2019. Now the Fed will stay on the sidelines unless inflation picks up. The phase one trade war deal is in the bag, meanings the trade war headline risks will be minimum. It looks like the coast is really clear for a great 2020 to start the new decade. But, there are quite a few concerns to consider:
- Election related volatility and risk
- Overvalued stock market
- Short term interest rates picking up
- Unknown black swan events
These concerns will put a lid on the rally. If the concerns are severe enough, they will derail the rally to produce a 15-20% correction.
January 18 2020 is the day that the global business confidence cycle enters a new phase. If the stock market rallies into that day (it’s a Saturday, so the high could happen on the Friday before or the Monday after) to make a new high, it could have very serious implications that the stock market will make a sharp correction and the correction will last until Q1 2021.
It seems very counter intuitive that such a severe and long correction could happen when the current administration will do anything to support the stock market rally. But cycles are cycles, they will happen regardless the manipulations by the governments. The manipulations may abate the severity of the cycles, but they can’t make the cycles disappear completely. If the governments could make the cycles disappear completely, then we would have never had the recessions. The governments don’t want to admit that the business cycles exist openly, but they are trying hard to lessen the effects of business cycles.
So before we can fully forecast the 2020 outlook, we need to survive the test of Jan 18th cycle turning point. JPMorgan Chase and Citi Group will report earnings on Jan 14th before the market open. This will start the Q1 earnings season which could potentially further drive the market to deeply overbought condition, which could also be the catalyst for the market to rally into Jan 18th. Remember in Jan 2018 right after the tax act passage, the market plunged over 11% in two weeks due to excessively low volatility. The same type of event could happen in Jan 2020.
The growth stocks rallied with the general market since the December 2018 low. After the summer 2019 top, the growth stocks corrected into early October 2019 with the general market. However, the growth stocks didn’t participate the rally from early October 2019 at all. If it’s a genuine bull market, the growth stocks can’t be left behind. Check out VEEV chart, it is still in the bottoming process. VEEV represents the best kind of growth stock with huge total addressable market.
The Fed was successful at keeping the repo rates low at year end by injecting massive amount of cash into the system. If and when the Fed stops pumping money into the repo market, what would happen? No one knows for sure. So there are things could happen out of nowhere to give the market a correction. Currently, the S&P 500 cash index is 25.43% over 200-week moving average, which is quite high. Apple being the best stock of the year, is richly valued for a company who’s main product peaked in 2015. The software service generates less than half of the total revenue. Apple still relies on iPhone sales for its main revenue source. The consistent stock buyback has helped Apple’s P/E ratio. Without buybacks, Apple would have looked a lot less attractive in terms of valuation.
We can’t possibly forecast the catalyst that will cause the market into a correction. But we waiting for the market to tell us what to do at this pending cycle turning point on Jan 18.
On the S&P 500 cash index daily chart, it is two days into the daily cycle bottoming process. From here to Jan 18th, the market will be choppy.
In our next few blogs, we will talk about investment themes for the new decade. We believe the new decade will not be dominated by the same technologies. New life changing innovations will provide new opportunities.