As Good as It Gets?

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I live in a world of macro and fundamentals. The basic reason for this is that I can't think of a situation where they didn't inform me of the future. Together, macro and fundamentals can tell us quite a lot about longer term stock market potential.

The problem now is that it's really easy to see how fundamentals and macro are peaking at essentially the same time. That's bad. Specifically, GDP is clearly slowing down quarter over quarter, and I can't figure out how we can get to a higher peak of GDP growth going forward. There are plenty of hockey stick charts of earnings where the back half of 2019 sees a dramatic recovery, but I view that as ahistorical and very unlikely.

For better or worse, we've just seen peak profit margins coupled with extremely good sales growth, and we can already see cracks in the foundation of earnings growth, while analysts and companies seem to universally say sales growth will slow. Most fundamental data series mean revert to one extent or another, and particularly considering things like the 2017 stimulus package having run its course, it's really hard to see how fundamentals get better.

What can keep the market up? There's usually something out there that people can point to as a reason for the buying. Seems like the basic reasons people point to now are the ideas of central banks intervening and trade deals. How much stock should we put into that?

The Fed will just cut rates now because Trump doesn't want a 5% decline? I suppose you can believe that, but that strikes me as awfully thin gruel. Doesn't it make more sense that we would actually see a market or broad economic decline before the Fed comes in with dramatic action? That's what's happened in the past.

As for trade deals, the dates they're talking about for full implementation are now five years out and now we seem to be starting a bit of a trade war with Europe. Again, you can choose to believe trade deals will save us, but I believe in weighing odds, and those odds aren't encouraging.

I think the main reason for investor sentiment continuing positive is that the decline hasn't actually started yet. The data may be poor and generally getting worse, but the market hangs in there like a champ. I guess after all those years of bullish success, no one wants to throw in the towel too early?

Consider this a wakeup call. Nothing is coming to save this market. Can it hit new highs? Sure. My crystal ball has nothing to say on what can happen in the short term. But looking forward from this point I believe I have good insight into the future potential paths of GDP and earnings.

In the long term, prices tend to follow earnings, and I believe we're headed towards some very weak probable future market scenarios. At this point, I'd recommend you get as conservative as career risk will allow. Could you miss another market party? Of course, but at this point the odds seem very skewed to the downside.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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