Wednesday, August 8, 2018

Our Latest Log Entry: Washington's Pushing the Needle

Sharing the latest entry to our log:

8/7/18 (Tuesday)

The market continues to hold up remarkably well given the trade war threat, which I attribute 100% to favorable general conditions, as there’s absolutely nothing bullish in the prevailing rhetoric. 

My "remarkably well" comment notwithstanding, given the hugely strong setup coming into the year, the exceedingly positive Q1 earnings results, and I’ll say notably positive Q2 results, tax cuts, etc., the fact that the broad market isn’t up considerably more speaks to the ill-effects/uncertainty of protectionism.

Under the surface I’m seeing some cracks beginning to form: For example, copper’s been getting killed lately, the staples/discretionary ratio has turned decidedly in favor of staples, the Bespoke Consumer Pulse report, while not in panic mode, shows a consumer whose confidence is beginning to wane, and the PMIs are screaming tariff/inflation risk.

Trump said last week that he’s doing this because the market is allowing it; i.e., it hasn’t fallen apart in the face of his tariffs (imposed and threatened), allowing him to push the needle. It’s clear to me that when the market ultimately tanks, he’ll abruptly change course. The question remains, will general conditions at that time support a resumption of the bull market or will the train have already left the station? I.e., will probabilities favor continued expansion or will general conditions have rolled over to the point where the odds favor recession?

For the moment, conditions favor the former, and, therefore, demand – as long as bullish macro conditions persist – that we remain mostly cyclical in our equity mix and essentially ignore what is certain to be a heightened degree of volatility as trade disputes play out and as mid-terms approach, while remaining open minded and flexible along the way.

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