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Market Update – December 13 2018

There’s a positive inflection point that seems to be coming up in January.

First, the market is oversold. The short sellers’ selling pressure is done. Which means most have closed out their positions for gains. And makes room for more buying.

Second, the Federal Reserve looks likely to pause on rate hikes. The markets reacted favorably when they hinted that rates were just below “neutral” – where rates should be to match inflation… where consumer prices don’t heat up too quickly.

Both of these factors combine to remove additional selling from here.

Meanwhile, fundamentals are about to turn positive.

The China-U.S. trade tiff will abate.

Political pressure will force compromises… On both sides.

China is bleeding and Trump is keeping up the pressure (the latest hit – arresting Huawei’s CFO).

However, this could quickly reverse.

The next wave of tariffs are set to hit in Q1 2019. This new set of tariffs are different from the first wave – which hit goods that were price elastic (the first round of goods had easy substitutes that were not made in China).

This next round hits goods that Chinese manufacturers dominate – which will be inflationary. (Chinese manufacturers need to raise prices in order to maintain their profit margins. U.S. consumers will pay that increase in price on the respective final good.)

Indeed, today’s NFIB Small Business Survey reflected these concerns and slumped to a low level.

Bottomline: pressure to cut a deal is building. The results will make the markets happy. And rally.

Lastly, fundamentals of the U.S. economy remain strong. Any slowdown will be a lot more mild than currently priced in.

One way to approach this would be to buy stocks that are more domestic. Restaurants, for example. Side note: avoid anything oil related.

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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