Daily State Of The Markets: The Question - How Much Is Enough?

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL-OLD, RWM, RYARX, RYRSX, SBUS, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: David Moenning
Summary

For me, the key question regarding the macro view is how much is enough?

As in how much do prices need to correct to create value?

Or how much is growth slowing? Inflation building? Etc.

In pondering the macro picture over the weekend, it occurred to me that the current environment can be summed up with one simple question: How much is enough? As in, how much do stock prices need to correct from their January blow-off highs in order to create a fairly valued market where longer-term, fundamental oriented investors return to the game in a meaningful way? Or, put another way, how much time needs to go by for rising earnings to create values in the market again? A month? A quarter? A year? How much is enough?

The key problem in trying to come up with an answer is there are host of additional "how much?" questions that need to be answered first. Sure, we can do some math and project what forward P/E's might look like in a few months (and according to "the man who moves markets" - AKA JPMorgan's Marko Kolonavic - valuations are looking better and better). However, there is an awful lot of uncertainty in the markets right now. And until we get some clarity on some of these issues, the question are likely to remain unanswered and the sloppy action is likely to continue.

For example, one of the key questions right now is how much is global growth slowing? Or is it actually slowing at all? Since a fair amount of the recent bull run was based on the idea of synchronized global growth, a slowdown in growth means adjustments need to be made.

Next up is the question of how much inflation is percolating? Everybody on the planet knows that there are "some" inflationary pressures thanks to commodity prices, tariffs, the tightening labor market, etc. But how hot will inflation become in the current environment?

The next question of how high rates will rise goes hand in hand with the inflation issue. While most folks are aware of the inflationary issues and the fact that Jay Powell & Co. are raising rates, the not-so small matter of treasury supply is also a major factor here. Lest we forget, it is estimated that the U.S. Treasury will double the amount of bonds it needs to issue over the next 18 months. So, when you couple this with the Fed unwinding its balance sheet, there can be little argument that there is likely to be upward pressure on rates. But, how much pressure?

Then there are the political and geopolitical risks. How much risk is there relating to what is politely being called a "constitutional crisis" (aka, impeachment proceedings)? Trust me, I'm not taking sides on whether or not this should happen, but I'd be a fool to ignore the possibility of such given everything that is going on in D.C.

On the geopolitical front, the question remains the same, how much risk is there? Are the issues with Korea, Iran and maybe even Russia, real enough to have an impact on markets? If so, please forgive me for asking the same question repeatedly, but how much risk?

And finally, there is the question of how much impact, if any, will there be from the trade fight with China? A lot? A little? None?

So, there you have it. Yes, the economy is growing. But we knew that. The earnings parade has been stellar. But, we knew that was going to be the case too. And companies are investing again in people, plants, and equipment. But, again, with all the hullabaloo surrounding the passage of the tax stimulus bill, none of this is really a surprise.

In sum, I believe the real key to this market is, yep; you guessed it, how much is enough? And if you have any ideas on the answer, please let me know. But in the meantime, I'm going to try and listen to Ms. Market's "message" as closely as I can in order to try and get some clues.

Thought For The Day:

You cannot escape the responsibility of tomorrow by evading it today. - Abraham Lincoln