First of all, the Greatest Show on Earth wrapped up on May 23 with Indian elections producing a resounding victory for PM Narendra Modi and his party BJP. Modi got complete mandate to lead India for next 5 years. Congrats to Indian voters for making a wise choice in electing Modi and rejecting one of the possible 22 PM candidates from smaller parties (yes - Rahul Gandhi is from a small party called Congress). Even if large number of Indian voters are un-educated, they have demonstrated lot more maturity in selecting their leader than educated electorate in Britain.
As I said in last couple of blogs, "Sell in May and Go Away" was right on mark! It was one of the worst May month since 2011 and first down month of 2019. Just six weeks back S&P was on its way to 3000. And then it all fizzled out. Let's see what changed the narrative.
As I said in last couple of blogs, "Sell in May and Go Away" was right on mark! It was one of the worst May month since 2011 and first down month of 2019. Just six weeks back S&P was on its way to 3000. And then it all fizzled out. Let's see what changed the narrative.
- Brexit - PM May had to announce her resignation due to Brexit mess. British must be thinking what mess they got into by narrowly voting for Brexit. New PM (Boris?) will most likely push Britain into Brexit without deal with EU and cause some nervousness. It would have been better for them to of for another referendum (maybe best of 3) and let people decide instead of MPs.
- Trade War - The US and China trade squabble is turning into war of words and could lead of real trade war. It may be that both sides want to raise the stakes leading up to G20 meeting in Japan so that both Trump and Xi can play to their respective populations and then agree to deal.
- Tariff Wall - President Trump opened another front in his trade war. Since he cannot get funding for real wall at US-Mexico border, he is using threat of tariffs (Tariff Wall) to influence immigration. Given Mexican President's statements, most likely Mexico would do something about people coming into US and Trump would soften the threat
- Slowing Economy - Q1 grew at 3.1% but again doubts started taking roots about overall GDP growth. This is evident from 10-year treasury reaching 2.13 (lowest in 2 years). Just in Dec, Fed was talking about multiple interest rate hikes in 2019 and 2020. Now most likely they would end up cutting rates by 1 or 2 times in 2019. Finally Trump may be getting what he was saying about interest rates but given 2020 election cycle, he should be careful what he wished for
- Chips and Oil - Semiconductor chip prices are indicators of modern economy and oil price is indicator of 20th century economy. And both of them are down. With these down and inverted yield curve, signs are pointing to potential recession on horizon.
So what should one do? It depends on what politicians and policy holders would do. Trump can change his tune on tariff (for both China and Mexico) on a tweet. Fed chairman Powell can give definite indications of next step being interest rate cut. Chairman Xi can give some positive indications at G20 about deal with US. These three people can change the narrative of the world economy and hence the markets. So I am still cautiously optimist in terms of 2019 year end target being closer to 3000 than 2500 (currently S&P is right in the middle at 2752). So if you believe in the cautious optimism, next two weeks should give ample opportunity to invest. My favorite sectors are Semi, Tech, Biotech and Energy. As they say, "When Chips are down, it's time to go all in"! (if you have the right hand).
Go Warriors!
Go Warriors!
/Shyam
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