2020: Retrench, Rally; Repeat
Whenever headlines are hysterical and commentators equally excitable, it is always worth inspecting the numbers for a reality check. Following last week's drone strike on a leading Iranian general, US equities fell by -0.8% on Friday but the inevitable risk-off move in markets has been moderate. Not surprisingly crude prices were higher but not excessively so. Now that America is a net exporter of oil they are far less dependent on Middle Eastern production than in the past. Paradoxically, the higher the oil price goes the more that US shale-oil becomes profitable thereby offsetting the usual feedback loop that generates a price spike. One asset that has moved up aggressively overnight is gold with gains in excess of +3%.
We are expecting a natural pull-back in share prices in the first few weeks of 2020. This is because the break-out into all-time highs has sent the financial Fear and Greed index well into the 'greed' zone (currently 93/100) so any decline will provide a welcome period of respite and consolidation ahead of the next up leg.
Despite the temptation with the start of a new decade, we have avoided making grandiose forecasts about the '20's' to come. The long-term is made up of a series of short-term scenarios and the latter is all we can realistically attempt to master. Ultimately the most important factor to ascertain is whether we are in a bull, flat or bear market. Last year the bears owned the news while the bulls owned the market. The longer that bad news abounds (or more correctly negative opinions) the better this is for us as it lives up to the old Wall Street adage that 'markets climb a wall of worry'. Positive opinions will eventually abound along with the usual euphoria. These are warning signs that a market peak is approaching but we are a long way from that scenario.
Many point to the length of the current upturn without comparing economic output with past cycles or going beyond personal memory. The decade-old bull market is by no means excessive in length in the context of the last century. One must also be aware that financial commentary is often an echo chamber where simplistic views and catchy phrases are repeated with little evidence of proper research. The classic one last year was the chatter about inverted yield curves as a forerunner for recession. As we highlighted at the time, the 2019 inversion most closely matched episodes of fear in 1998, which of course preceded a major melt-up in markets, rather than a melt-down. There seems to be an inherent human desire to simplify relationships to a linear 'A leads to B' without considering the backdrop, causality or cyclical nature of markets.
Looking ahead, we can expect at least another positive year but more likely two. The final phase of a bull market is the most rewarding with the closing scenes typified by a high degree of retail buy-in while the smart money makes an exit. We are highly attuned to such crowd behaviour and will be highlighting and acting on it as we approach any climactic spike but this will be an issue for another year in the future.
Past performance is not a guide to future returns. Please note that the value of your investments can go down as well as up and you could get back less than your original investment.
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