Why am I bullish? Because it’s too easy to be bearish
We appear to bending the 3rd quarter on a more positive note as US indexes rallied on Thursday, as bond yields fell. I could not help myself but get more optimistic about the outlook for stocks in the final quarter. There are plenty of neighsayers out there, the valuation of US stocks, leading indicators falling for 17 months on the trot, and weakening PMIs, to name a few. The variety of metrics that bears point to when it comes to predicting economic recessions, not least of which is the inverted yield curve. All this is true.
I was also encouraged by the thoughts of #Karen Ward, an economist I worked with for several years, who now is chief equity strategist at JP Morgan and an advisor to the government on policy. Karen recently wrote a piece questioning whether the US consumer, who has fundamentally supported the US economy as rates have risen, can continue to do so in the face of dwindling saving rates and higher interest rates. Those on LinkedIn can read the thoughts in full, but in a nutshell, her view is yes it can. Mainly as higher interest rates are not biting into the US economy the way it often does as homeowners have taken advantage of the period of low interest rates to fix mortgages for many years to come.
So why do I think there is room for optimism for stocks? Firstly, are bond yields likely to go higher or lower from here, the probability is lower, tick for stocks. US Conference Board Leading indicators have been on a downtrend for 17 months, they are now stabilising and showing signs of moving higher as one can see from the attached chart kindly produced by JP Morgan, another tick. Is there plenty of cash on the sidelines waiting for the opportunity to go back into the stock market, yes another tick. Will the US government shutdown happen, maybe, but probably unlikely as there is almost always a last-minute agreement. Even a brief shutdown would not have an immediate impact on economic activity, another tick. Once you clear out the magnificent 7, as they are now being dubbed, valuations are not so bad, in the US and reasonably attractive across the rest of the world, another tick. As we pointed out the other day investor sentiment is pretty downbeat at present, yet more ticks for a rally. Earnings season is upon us very shortly, Analysts’ revisions for so long have been negative and are now turning positive, you guessed it another tick.
So what’s the bear case? What could throw this theory off track? Oil prices. Rising oil prices are a tax on consumption, plain and simple. Consumers have held up assisted by falling oil prices, and that tailwind is showing signs of fading. Sadly there is little in reserve to meet demand, having said that it does not suit the oil-producing nations for the price to run too high.