Where is the Market Headed?

This is the time of the year where the markets tend to make minor corrections and pull back a little. The market sell-off this year during the previous few weeks has the appearance of being a bit more than that as over 1,100-point drop in the DOW is a tad excessive for a December sell-off. December usually sees some serious action due to large mutual funds and institutions selling positions to rebalance, fund redemptions and getting out of positions that no longer are desired for the “health” of the fund or portfolio. But as we have been in an extended bull market for nearly a decade, this could be the start of something more.

Recently, I read that the US’s new unofficial trade war may have cost the S&P 500 as much as 10% so far and it is projected to get worse possibly. Leading up to the recession in 2008 the trade imbalance between the US and China was extremely excessive and very much in favor of China over the US. This enabled the Chinese government to buy up just about as many US Treasuries as they could pay for with this cheap source of funds. And China is still enjoying excessive trade imbalances that favor them over the US, and in the previous few months, this trade imbalance has actually widened. It seems that the trade war appears to be more one-sided than it is a war as the US is not even playing the same game as the Chinese. While they can place imports of such magnitude on our exports and to a large degree can manipulate the price and to a large degree manage the press associated with these tariffs. The US does not have that advantage of controlling the price war, and the press here basically lays the facts out as they are not as the government wishes them to be.

Trade imbalance

Then there is the fact that the trade imbalance is so far out of control that China can export their goods to trade partners all over the world and do it without a domestic policy that thinks and with an administration that believes all of the US’s trade negotiations are one-sided. While they may not have been perfect, in truth they never are, and in all successful partnerships there is a fine balance of give and take between all parties involved.After all, what country in their right mind is going to agree to a trade policy that is strictly one-sided and show little or no benefit for one of the parties involved. Those are trade pacts that may look good and last for a short while, but in the end, they will fall apart and dissolve into something that does not work for anyone involved. But there have been some extremely good trade policies that the US has withdrawn from that we were in actuality better than the ones that are currently being proposed to replace in particular NAFTA and the Trans-Pacific Trade Partnership that we pulled out of after the current administration took office. And the one thing that was constant in both of the old policies was that they were considered fair for all the countries involved even though the US was not favored but a willing and useful participant in the agreements.

Then there is the fact December is the time of the year that many investors are rebalancing their portfolios to prepare for the upcoming year. Then there is the fact many large mutual funds also have redemptions in December and sell off positions to fulfill the redemptions of their investors. The selling of securities in December is also when many are doing tax planning for not only the current year but also in their planning for the following year as well. It is funny how taxes can play an important role in what happens with the markets at year’s end. And it is not just average investors and mutual funds that typically sell now it is also institutions and large hedge funds.When all of this is combined, it leads to what can typically be a fairly volatile December that can indeed create some incredible buying opportunities for those who are on top of their game and have been doing their constant homework on the equities that they have their eye on.

Whenever the markets make a pullback,it is not the panic and sells but rather buy if you have the means to do so. Let us face it; this past week would have presented some fabulous opportunities to buy some quality companies at reduced prices. But as we do not know where the markets are headed, it may be wise to slowly enter into your positions instead of going all in at once. As history has shown us the markets repeat themselves on their own cycle and not on any set time frame.

Future for the US

Then when you consider that there is a slightly inverted yield curve in two and five year Treasuries,you may indeed have a reason for pause. Housing numbers are slightly off and money, while still cheap, is edging up in cost as well as the Federal Reserve attempts to control inflation by raising rates in a controlled manner. Now the issue is longer termed rates are not rising as fast as the short-term rates which means liquid fast money may be slowing and when all of this is taken together it could be the early signs of something more to some and could even lead to a recession in the not too distant future for the US.

While I am not predicting a recession I think that the markets are in for some changes and a bear market is long overdue. The last month has seen the markets going all over the place, up one day and down the next. Yes, it is true no one knows where it will go next, but one thing is for sure, if we do not look at the history of the markets we will be caught off guard when it does make that turn and goes from bear to bull.

If you have any questions or comments, please feel free to leave a comment or contact me directly.