Byron Wien December 2018 Commentary
And he’s back with his latest commentary that covers both the bullish (earnings growth, valuations) and bear (politics) elements facing the market today, several great points are made.
As usual here’s some snippets and a link to the rest of the article.
For these reasons I thought the equity market would have to go through a correction to improve valuation and sentiment. In October, the sharp decline in the market wiped out all of the gains in the indexes from the beginning of the year. Major investment advisors changed their view of the outlook from positive to negative. Sentiment moved into pessimistic territory. The S&P 500® is only selling at 15.6 times 2019 projected earnings. Conditions became favorable for the year-end rally I had been expecting.
A parallel to the current market condition occurred in 1998. The economy was growing at close to 5% and the market had a 20% correction. Investors were not anticipating a slowdown because the economy grew close to 5% in 1999. The problem was the Asian financial crisis. Equities recovered and went on to reach a new high before the bear market of 2000. What might be causing the recent selloff is monetary policy. The Fed has been raising rates and shrinking its balance sheet by $50 billion a month. That can be reversed at any time.
There is another problem with China that has not received as much media attention. According to a New York Times report, there were 18 “unsafe” incidents in the Pacific Region between Chinese and American ships and aircraft in the past year. Last May, Philip Davidson, head of the United States Indo-Pacific Command, testified in Congress that China controlled the South China Sea and that put us on the defensive. I have always thought that China was focused on its economy and was deferring geopolitical ambitions to sometime in the future. In what is believed to be their 100-year plan (Mao defeated Chiang Kai-shek in 1949), China hopes to be the world leader in economic strength, military capability and political influence by 2049. Right now, however, economic progress is paramount. The market is reacting as if the trade war could lead to something more serious and I don’t see that happening now.
Source: Blackstone