Happy New Year! We are off to what promises to be a very important year for markets and the economy.
Contrary to what the growing narrative has been on the economy and stocks over the past several months, I think we’re in for a hot economy, a big bounce back in stocks and resumption of the bull market in commodities.
The pieces are in place. The linchpin will be China.
On that note, Trump had been in the clear position of strength in the negotiations on China, until stocks began to melt.
A sour stock market can ultimately erode economic activity. And that becomes the big risk heading into this new year.
The Trump agenda has had big wins on the economy. But those wins are at risk of being undone if the stock market calamity continues. This is the weakness I’ve suspected has been exploited by China. The indiscriminate selling has had all of the appearances of liquidations and/or manipulation. With few cards to play, this (hitting the stock market) was one they could play.
Now, if we look back through history, major turning points in markets have often been the result of some form of intervention. With that in mind, to counter the indiscriminate selling of stocks, on December 23rd we had a response from the U.S. Treasury Secretary and (the next day) a meeting of the “President’s Working Group” on financial markets. That was an intervention signal. When stocks re-opened after Christmas the bottom was in — stocks rallied 7% over the last four days of the year.
Again, market followers like to have very clear, neat evidence to describe every tick in markets. And that leads them to very wrong conclusions when markets are at extremes (as they force their worst case scenarios to fit the price). They don’t factor in the influence of intervention and manipulation (both by policymakers and powerful market players). Markets are made up of people (and their varying motivations), and the evidence isn’t always so clear.
Bottom line: As I said in my last note before Christmas, the lower stock market has put pressure on the Trump agenda, which makes it more likely that concessions will be made on China demands. My bet is that a deal on China would unleash a massive global financial market rally for 2019, and lead to a big upside surprise in global economic growth.