The "Grinch" who stole Santa Claus Rally!

After writing my last blog on All Clear for Santa Claus Rally?, I never thought that my next blog would be on "Grinch who stole Santa Claus rally". But that's exactly where markets are at. It's just over 2 weeks and December which is normally a good month for markets is turning out to be worst December since great depression - yes that happened almost 85 years back! So how did we landed here? Well - lots of reasons and any or all of them are playing "Grinch" stealing what was supposedly Santa Claus rally after treacherous Oct and Nov. Let's look at these.

• Fed got itself into a bind by pre-signalling rate hike in Dec. With markets at delicate stage and inflation under control, ideally they should and would have liked to skip interest rate hike in this week's meeting. However President Trump's public statements against Fed would make Fed's job difficult in skipping interest rate hike. So if they increase, it's problem for markets (and possibly economy). If they don't increase, it would seem like they are coming under President Trump's pressure and that's not good for markets. So Fed got itself into hard and rock place! Hope Chairman Powell can navigate thru this on Wed.
• Government Shutdown: Looking at interactions between democratic leadership and President Trump in front of cameras was incredibly immature for all folks involved (including Pence who did not say a word). Now if they don't come to a deal, we are looking at Government shutdown right before holidays. 
• US/China trade war: Both President Trump and President Xi are sending signals but none of them are going to blink eye before holidays. That means we have to wait for another few weeks to know if both countries would reach agreement to stop getting into full-blown trade war
• Brexit and European Messiness: Brexit or not Brexit! No one knows what will happen and time is running out with deadline of Mar 29. France's yellow-vest movement, Merkel's problems in Germany making her lame-duck till her term is over and Italy's budget signals - all leading to erosion of confidence in EU economic growth.
• Slide in oil prices: Oil price is indicator of world economic growth. With oil prices sliding 52 week low means GDP growth would be lower in 2019
• FANG getting deFANGED: The curse of trillion $ valuation caught up with Apple and Amazon  and both are down significantly. Collectively FANGs lost close to trillion $ valuation in last 3 months. Same is happening in Semi and other tech stocks.

Many factors are playing "Grinch" stealing the Santa Claus rally and there is no immediate catalyst to turn around the sentiment. Only silver lining could be when optimists like me give up on markets going up mean markets may be close to bottom!

Happy Holidays!

/Shyam

All Clear for Santa Claus Rally?

Three most important men in terms of impact on market (President Trump, President Xi and Fed Chairman Powell) played nice to each other and markets. Starting with Powell's speech that interest rates being closer to neutral rate means pause after expected 25 basis point increase in December. Over weekend during G20 meeting, both Trump and Xi agreed to pause raising tariffs on Jan 1 and keep talking to reach "biggest" trade deal between US and China in next 90 days. With markets reaching low 2600 couple of times in Oct and Nov and rates and tariffs worries subsided should bode well for Santa Claus rally going into new year. Would markets reach all-time highs? It depends. If signs of substantial progress is made on trade talks between US and China, interest rates are not increased and economy still shows 2.5 to 3% growth without inflation, we could see markets reaching all time highs in Q1 of 2019. Of course FAANGs and Semis need to rejoin the party. That can happen if Q4 results continue to show momentum in top and bottom lines. At least cloud software companies like Salesforce, Splunk, Workday are keeping up the momentum. Semis (MU, AMD, Broadcom etc) and Energy (with stability in oil price) need to demonstrate that bottom is in. Healthcare seems to be holding up well. With biggest Biotech IPO (Moderna) around the corner should be good for biotech stocks also. 2019 would be a big year for tech IPOs with Uber, AirBNB, Lyft, Palantir and so on. Weekend was interesting with college football championship matchups. In SEC championship, Alabama showed why it is #1 team in college football by rallying from behind (14-28) to win by 35-28 that too with help of backup quarterback. Hats off to Jalen Hurts! Now looking forward to who takes the #4 slot for playoffs (Oklahoma or Ohio State).
President George H.W Bush died on Nov 30 at age 94. He was one of the best President who did not get his due recognition despite ending cold war and navigating thru economy at difficult times. He was true patriot and we will miss him.

/Shyam