Stocks on March 21, 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. Trump will announce tariffs on China tomorrow. Let’s see what the stock market does.
  2. NAFTA renegotiation is on the right path. Odds of a trade war or NAFTA fiasco are low. Not a long term bearish factor for stocks.
  3. Household networth is surging. Not a medium-long term bearish factor for the stock market.
  4. The U.S. stock market won’t underperform other stock markets just because it’s “more expensive”.
  5. Whether the Fed hikes rates 3 times or 4 times this year has no impact on the stock market’s medium-long term direction.

5 pm. Trump will announce tariffs on China tomorrow. Let’s see what the stock market does.
Trump will probably announce tariffs on China tomorrow in retaliation for intellectual property theft. This isn’t a medium-long term bearish factor for the stock market because China is even more afraid than the U.S. of a trade war escalation.
China intends to respond to U.S. tariffs with small-scale counter tariffs on soybeans. China wants to prevent a trade war from escalating.
We’re not even sure if this is a short term bearish factor for the stock market. So far the stock market has sold off on the day of a tariff announcement (steel and aluminium), but quickly recovered those losses over the next few days.
Focus on the medium-long term, which is bullish.
3 am: NAFTA renegotiation is on the right path. Odds of a NAFTA fiasco are low. Not a long term bearish factor for stocks.
There are more and more signs that NAFTA will be successfully renegotiated. From Investing.com

The U.S. government has dropped a demand that all vehicles made in Canada and Mexico for export to the United States contain at least 50 percent U.S. content. This was a major point of contention in previous rounds of NAFTA talks.

In other words, the Trump administration wants to strike a deal. Trump is willing to back down on things that would lead to a failed NAFTA renegotiation. (Trump had previously said that this point was “nonnegotiable”. Clearly not.) Trump’s threat of “just walking away” is his way of bargaining with Canada and Mexico.
I think the odds of a failed NAFTA renegotiation are low. This is not a medium-long term bearish factor for the stock market.
3 am: Household networth is surging. Not a medium-long term bearish factor for the stock market.
U.S. household networth is surging to new highs. The ratio of household networth to disposable income is now 6.8, the highest it has ever been since the Great Depression. CNBC thinks that this is a long term bearish sign for the stock market. It isn’t. This is a useless indicator for timing the stock market. It’s even worse than common valuation indicators like the S&P 500’s P/E ratio.
For starters, this indicator has been consistently elevated since the mid-1990s. Being out of stocks just because “household networth is too high” would have led you to miss out on the all of the stock market’s gains since 1995.
Moreover, this indicator was useless for timing the bull market’s top in 1968. It was flat throughout the entire 1940s and 1950s, and actually fell towards the end of the 1960s.

3 am: The U.S. stock market won’t underperform other stock markets just because it’s “more expensive”.
Conventional dogma states that “cheap assets” should outperform and “expensive assets” should underperform. Traders who rely on valuation think that the U.S. stock market will underperform foreign stock markets because it’s more “expensive”. I disagree.
There is almost no correlation between countries that are “cheap” and forward returns. “Cheap” stock markets tend to be cheap for a reason – in many cases it’s because their earnings growth is very weak. These “cheap” stock markets can remain cheap for years.

So think twice before you switch from U.S. stocks to foreign stocks (e.g. European, emerging markets) just because foreign stock markets are “cheaper”.
3 am: Whether the Fed hikes rates 3 times or 4 times this year has no impact on the stock market’s medium-long term direction.
The financial media is debating whether the Federal Reserve will hike rates 3 times or 4 times this year. I say “who cares”!
Think about it. They are arguing about a meager 0.25% rate hike! The economy is not going to crash because interest rates went up an additional 0.25%. The stock market isn’t going to crash because interest rates went up an additional 0.25%. This economic expansion isn’t built on toothpicks.
Rising interest rates are historically bullish for stocks until the 10 year yield reaches 4.5%. It’s not even at 3% right now.
Read Stock market on March 20: outlook

Outlook

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

  1. The S&P has made a 6%+ “small correction”. This will not turn into a “significant correction”.
  2. 2018 will trend higher but also be a choppy year. There will be another correction later this year.
  3. The S&P 500 has approximately 1-2 years left in this bull market.

I do not use my discretionary outlook to place entry/exit trades. I am 100% long SSO (2x S&P 500 ETF) 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 long the S&P 500 since September 7, 2017 when it was at 2465.
*I also have a small Day Trading portfolio. Click here to view my day trades.

1 comment add yours

  1. Hello Troy
    Xi Jing-Ping has become the emperor
    Therefore I think China will cancel a lot of airplanes made by Boeing ( not soybeans )

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