Stocks on January 29, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.

Thoughts

  1. The S&P 500’s decline had nothing to do with rising interest rates.
  2. Buy multi-national U.S. stocks
  3. Inflation will rise in 2018 as wage growth picks up.
  4. There is no such thing as “bearish seasonality” for the U.S. stock market.

Read Study: the stock market’s rally is accelerating
4 pm: the S&P’s decline today had nothing to do with rising interest rates.
Mainstream media feels the need to explain every single short term movement in the markets. Apparently, the S&P’s decline today “was caused by rising interest rates”. This isn’t entirely true.

  1. The 10 year Treasury yield went up from midnight to 5 am. The S&P fell during this time.
  2. The 10 year Treasury yield has been falling since 5 am. The S&P fell until 11 am. In other words, the S&P continued to fall even though Treasury rates stopped rising.

Historically, the correlation between rising interest rates and the stock market has been extremely random. Rising interest rates aren’t consistently bearish for stocks. For example, interest rates went up from 20042006 due to rising inflation and Fed rate hikes. During this time:

  1. The S&P would sometimes go up when interest rates were rising.
  2. The S&P would sometimes go down when interest rates were rising.
  3. The S&P would sometimes go sideways when interest rates were rising.

Stock market investors and traders should ignore interest rates unless the yield curve inverts.
3 pm: Buy multi-national U.S. stocks
The U.S. dollar is in a bear market. From a forex perspective, companies that generate most of their revenues/earnings from overseas will see a boost in their revenues/earnings. A falling USD boosts the nominal USD value of their revenues/earnings.
The USD’s decline has already caused internationally-exposed U.S. stocks to massively outperform domestically-exposed U.S. stocks.

I expect internationally-exposed stocks to outperform over the next 2 years as the U.S. dollar goes down.
4 am: Inflation will rise in 2018 as wage growth picks up.
The NFIB’s Small Business Survey: Single Most Important Problem tracks the % of correspondents who state that finding quality labor is their most important business problem. This % increases as economic expansions age and labor markets become tight.
Historically, this % has tracked wage growth extremely well with a 9 month lead on wage growth.
Finding Quality Labor is increasing, which means that wage growth will rise in 2018.

Wage growth is an important part of inflation. This means that inflation will rise in 2018, which is bullish for stocks. Inflation is only bearish for stocks once it turns into stagflation. The U.S. economy is growing right now. So rising inflation is a medium-long term bullish factor for the U.S. stock market.
4 am: there is no such thing as bearish seasonality for the U.S. stock market.
The “Sell in May and Go Away” adage is wrong. Historically, the U.S. stock market does not have a bearish season/month in which it’s average return is negative.

Instead, the S&P only goes up at a slower pace from May – September. Hence, “Sell in May and Go Away” should actually be dubbed “Sell in May and buy back higher in September”.

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P will make a small 6%+ “small correction” in Q1 2018. The current rally is the longest one in history without a 6%+ “small correction”.
  2. The S&P 500 will close higher at the end of 2018 vs the beginning of 2018.

I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.
I have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.

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