Stocks on March 3-4, 2018: weekend 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. Auto sales are falling. We are in the final 2 years of this equities bull market.
  2. Trump’s trade war talks might cause the S&P 500 to fall below its 200 sma, but I don’t expect a significant correction or bear market.
  3. Inflation: we are clearly in the final few years of this bull market.
  4. Student loans are soaring. This is not a repeat of the mortgage crisis in 2007
  5. Trump will prevent a trade war from getting out of hand.

March 4. Auto sales are falling. We are in the final 2 years of this equities bull market.
U.S. auto sales continue to fall after a post-hurricane bump. Auto Sales tend to peak a few years before a recession and bear market begins. This confirms the Medium-Long Term Model‘s prediction that there are 1-2 years left in this bull market.

Trump’s tariffs on steel and aluminmum will increase costs for automakers, which means that car prices will rise as well. This puts further downwards pressure on U.S. auto sales.
March 4. Trump’s trade war talks might cause the S&P 500 to fall below its 200 sma, but I don’t expect a significant correction or bear market.
Trump heated up talks about a trade war by threatening Europe with tariffs on cars (think BMW and Mercedes). I’d like to point out two things about Trump’s tariff threats.

  1. There’s a difference between what Trump wants to do and what he CAN do. Congress was ok with Trump putting tariffs on steel and aluminmum. Cars is a whole different story. Trump cannot unilaterally start a full-blown trade war. Congress will block him, especially with the mid-term elections coming up later this year. Democrats will make a big comeback in this year’s elections.
  2. The timing of Trump’s tariffs was odd, and we now know why (see CNBC article). Trump wants to use these tariffs and threats to incite the media. He wants the media to turn its attention away from his administration’s internal problems. In other words, Trump isn’t very serious about starting a full blown trade war. He’s playing politics, and the media is playing right into his game. Trump’s bark is louder than his bite (anyone still remember the beaaauuuuutiifullll wall?)

So yes, a full blown trade war will probably cause a significant correction. (If so, this will be the 4th significant correction that the Medium-Long Term Model failed to predict since 1950). But I think the odds of a full blown trade war are low. Congress has a long history of supporting steel tariffs, but as a whole Congress supports free trade.
I think there’s a <50% chance that the S&P 500 makes a marginal new low below its 200 daily moving average. Trump’s tariff threat will cause volatility in the stock market, but I don’t think it will cause the market to crash.
March 3. Inflation: we’re clearly in the final few years of this bull market.
Based on current data, the Medium-Long Term Model predicts that this bull market still has 1-2 years left. Inflation tends to rise by a few percentage points in the last few years of a bull market because the economy is at or beyond full capacity.
We are seeing more and more signs of inflation picking up. This means that we are in the beginning of the last leg of this bull market. For example, it’s clear that wage growth is picking up.

NFIB’s survey demonstrates the percentage of companies that plan to raise wages. There is a very strong correlation between this survey and actual wage growth (9 month lead). The recent surge in the % of companies that plan to raise wages implies that wage growth will rise throughout 2018. This puts upwards pressure on inflation.
March 3. Student loans are soaring. This is not a repeat of the mortgage crisis in 2007.
Student loans are soaring right now. But as I mentioned before, the student loan market is much smaller than the mortgage market. So any “blow up” in student loans will have a much smaller impact on the U.S. economy and stock market.


More importantly, 95% of student loans are guaranteed by the U.S. government and not by banks. So even if the student loan problem “blows up”, it’s not going to cause a financial crisis the way mortgages did in 2007-2009. It’s going to hurt the government, but it’s not going to topple the banks and hurt the private sector as much as mortgages did.
March 3. Trump will prevent a trade war from getting out of hand.
Investors realize that Trump’s recent tariff announcements are small-scale and don’t really impact the U.S. economy in a significant way. But they’re afraid that things will escalate and turn into a full-blown trade war. They think tariffs are a “slippery slope”. I disagree.
The Donald’s favorite measure of economic success is the stock market. He loves tweeting about the rising stock market (as if the bull market is all thanks to him). So if Trump goes down the road of a trade war and the stock market tanks, he will probably backtrack on his tariffs to prevent the stock market from falling any more. Otherwise he’d be shooting his own foot (or his mouth).
Read Stock market on March 2: outlook

Outlook

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

  1. The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
  2. The S&P 500 has approximately 2 years left in this bull market.

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.

5 comments add yours

  1. Can u post years & dates on which the s&p (while in a bull market) made a negative yearly return? The s&p closed last year at 2670. As of Friday’s close, we are now 20 handles in the positive for the year, so way under a 1% positive return. Not very much a positive return for the s&p going into the 3rd month of the year.

  2. Dear Troy,
    Do you see any coincidence of Trump tariff talk (Solar Panels, Washing Machines and now Steel & Aluminium) related to China’s introduction of ‘Petro Yuan” from March 26?
    Hike in tariffs on Solar Panels and Washing Machines were directly against China and recent hikes were partially against China.
    Is Trump worried about “PetroYuan”?
    Please let me know your views.
    Thanks in advance.
    With Regards,

  3. I don”t strictly define “medium term as >X # of months. “Medium term are the rallies between “significant corrections. So if 2 significant corrections are close to each other, then that “medium term rally will be short in terms of time. If 2 significant corrections are far apart, then that “medium term rally will be long in terms of time. “Long term = the entire bull market.

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