Summary
- Coronavirus is moving the needle on the year’s first possible correction.
- A correction was coming anyway due to slowing economic activity and slowly falling corporate stock buybacks, it’s coming faster now.
- We need to keep our eye on the ball, which is to look for opportunities to buy “smart everything world” and alternative energy assets for the 2020s.
- Here’s a quick look at the stock market danger zone and how to handle it.
In my forecast for the year, I suggested an early year rally interrupted by a period of volatility, a small correction, a rally and then a bigger correction.
The early part of the forecast is for traders to work with. It was always the most likely part to be wrong, regardless of whether it turns out to be right.
The second part of the forecast, which is for a correction in the second half of 2020 that is similar to late 2018 is more knowable and more important. What we would really like to find is a chance to buy great assets at much better prices than we have today.
Is The S&P 500 Breaking Down?
Here is a look at our S&P 500 (SPY) (VOO) chart again. It shows a support zone, that if it does not hold on back to back weeks, will signal a more severe downturn. If it holds, those willing to trade a bit, can be buyers. Folks who don’t trade, will want to use any following rally to really lighten up on stocks further – I presume everybody is approaching 50% cash or past that level already.
The area in the low 300s to high 290s on SPY is what needs to hold in order for the stock market to not experience a deeper correction. Whether you sell or not in that zone depends on your perception of risk and reward for you.
If you believe a larger correction is imminent, then selling there before we see the S&P 500 fall far deeper into the 200s at some point soon, is fine. If you believe another rally comes later in spring, then hold tight and sell into that rally.
In either case, don’t just click, click, click away, look for spots to sell a bit now and a bit later. Sell the rallies. Sometimes that means a full day rally after a down day, other days it’s just a rebound from an early sell-off. Don’t be panicked, be systematic. And remember, scale in and scale out go hand in hand.
Your risk tolerance is primary to trying to forecast the short-term move. That said, the underlying fundamentals of the stock market have broken down:
- Profits are flattening
- Stock prices are supported by higher valuations
- ISM numbers are flattening to turning over
- Employment numbers are showing all the signs of becoming progressively weaker
- Central banks, including the Fed, are pumping with less effect
- Coronavirus is an accelerant of the bigger downturn I forecast
Keep this in mind, if Q1 ends up being a negative quarter in China, and if they report honestly it will be, that’s bad for the entire global economy. While some of the Coronavirus slowdown will manifest in pent up demand that will have to be caught up in the next few quarters, much is also permanently lost economic activity. In other words, those GDP points are mostly lost forever.
How Is The Buyback Bubble?
One impact of Coronavirus hit on Q1 could very likely be a slowdown in corporate stock buybacks. Those buybacks are vitally important to the stock market as that has represented most to all of net demand for stocks going on three years now. That is, all other buyers and sellers in the markets have been net negative for a bit over two years now.
It is ONLY the stock buybacks that have generated demand for stocks to drive prices higher. Without the buybacks, there is less demand than supply, which in economics, always means falling prices until supply and demand match again.
Read this article from 2 years ago which described how and why “The Buyback Bubble Would End Badly.”
If cash flows slow to corporations, and it certainly looks like that is happening, then buybacks are very likely to slow significantly. If buybacks slow significantly, then we could see a very deep correction later this year. Look at other periods where buybacks slowed down a bit or substantially, a corresponding correction is always in play.
The Bernie Effect
As I have discussed in webinars, Bernie will get blamed for anything bad that happens in the economy or markets if he stays on course to win the Democratic nomination. That is nonsensical, but you can’t argue with some folks sense of rationalization.
Jeffrey Gundlach, in his very high opinion of himself view of the world, and several other mega wealthy, are drivers of this idea that Bernie is bad for the economy and markets. Gundlach is just forecasting price. Keep that in mind.
Since sentiment drives the short-term in markets, if some folks become sellers because they are suddenly scared of “Bernie world,” then we’ll see lower prices for a hot minute. That’s what we need to focus on.
I maintain that the economy would get better under any of the Democrats versus President Trump after they clean up the deficit and trade messes, as well as, move to add vital infrastructure and transition to a sustainable economic model with higher middle class wages and benefits.
Despite the breathy talking heads on TV and the internet, the United States and world continue on the slow, stumbly wobble into a brighter future that we have been on for centuries.
That is the way of things. The world gets better over time. A step forward, a stumble, a couple steps forward, a step back, a stumble, a few steps forward, etc… The net effect over any decade going back for centuries now, has been a better standard of living. There’s only been a few exceptions where the end of a decade wasn’t better than the beginning.
Ultimately, Bernie Sanders wasn’t my favorite candidate, however, I think he just serves as a counterweight to the siphoning of middle class labor and wealth into the pockets of the ultra rich. The world won’t change a lot with him in office, just as it has barely changed with President Trump in office.
How To Invest Now?
Our asset allocations moved to conservative over the past several months. Folks have been trimming on rallies and ought to be around 50% cash depending on risk tolerance and susceptibility to the FOMO virus.
As I said in Friday’s webinar and posts last week, I was lightening up a bit. I am currently between the 50% and 75% cash levels depending on the type of account.
Remember, I believe in being mostly invested, most of the time. For me to be this heavy in cash, I have to believe we are in line for a legitimate bear market. That is what I believe is coming sometime soon. I have FOGYAK – fear of getting my assets kicked – not FOMO.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
