The bulls hit the trifecta

12-03-2018

In a series of meetings last week with increasingly bearish Wall Street analysts, I repeatedly asked them this question: since you know that if the Fed keeps hiking rates until a recession sets in that a recession will set in, and since you know that if the U.S. and China don’t end their trade war that a recession would likely set in, and since you know that if Saudi Arabia and Russia allow oil to fall below $50 a barrel to $40 or lower it would negatively impact both of their economies as well as ours, are you saying that the short list of leaders who actually could prevent these outcomes either don’t see what you see or, even worse, don’t care? Their answer? Crickets.

Well, we have now gotten the answer that my bearish friends wouldn’t provide from the mouths of the policymakers they seemed so ready to dismiss: Fed Chair Jay Powell, Presidents Trump and Xi, and Saudi representatives and Russian President Vladimir Putin. In his speech before the Economic Club of New York on Wednesday, Powell made clear that, after December’s hike, the Fed believes it will be very close to neutral and thus will be all-the-more data dependent before making further moves. This means that we can expect more rate hikes only if incoming economic growth, employment and inflation data justify them. The stock market can live with this.

After their dinner meeting at the G-20 in Buenos Aires Saturday night, Presidents Xi and Trump declared a truce in their trade war, cancelling U.S. tariff hikes scheduled for January as representatives on both sides work to negotiate an improved trade relationship between the two mega powers. (This morning, there are signs that bears are clinging to the hope that negotiations will fail. Really?) And to complete the weekend, the Saudis and Putin—within earshot of President Trump at the same G-20 meeting—agreed to extend the OPEC quota agreement, laying the stage for a probable production cut at the OPEC meeting later this week. This is almost certain to set a floor under oil at $50, presumably because all understand that while cheaper oil is good for U.S. consumers, too-cheap oil is bad for American industry and jobs. A range of $50 to $80, which we are now likely in, is the sweet spot for the U.S. and global economy.

So as we take a victory lap, we reiterate our view to stay long equity markets on this move higher toward our 3,100 mid-2019 S&P 500 target. For sure, we are likely to see more volatility in the weeks ahead, first as we try to close today—and stay this week—above the market’s 200-day moving average of 2,760, which for many market technicians is the new ceiling. Expect an even bigger bull-bear battle to emerge later as we approach September’s record high at 2,930, which some well-known bears have stated is the cycle high for this bull. As we’ve noted repeatedly in the last several months, we will remain focused on the fundamentals, which based on the trifecta of good news we just received over the past few days, now look pretty sound for 2019. In the end, fundamentals generally win. With economic growth next year solid, earnings growth likely high single-digits and the market trading at about 16 times forward earnings, the fundamentals look good to us. Maybe we will have a green Christmas after all.