2019 was a year of epic returns, for those in the market.
Market trends in 2017 and 2018 led to 2019, and 2020, market behavior.
2020 is poised to continue recent trends.
On the heels of a historically outstanding year for major indices, now seems the time to reflect on where we sit today, how we got here, and, most importantly, what comes next.
If readers had merely mirrored the positions disclosed in each of my pieces this year, they would have accumulated a staggering 101+% gain.
This year was set up as early as 2017. The late 2017 run-up had the market in full-froth mode, peaking in January of 2018. At the end of January, macroeconomic data weakened substantially, and we called for a market correction, which struck immediately as the calendar turned to February. From that point on, the markets did their best impression of a lagging indicator, becoming extremely risk averse, even as we bought the drop and enjoyed a strong first half of the year. In Q3, fear of missing out took over, and buyers jumped back in with a vengeance. After another runaway quarter, however, the collective herd threw a veritable fit as it became apparent that the Fed would indeed continue slowly raising interest rates, just as it had telegraphed it would well in advance. Q4, of course, saw the markets fall to within an eyelash of the technical, and arbitrary, definition of a bear market.
(image credit: Yahoo Finance)
Market dislocation from late 2017 to early 2018, and in late 2018, then, set the stage for another, even greater rally, beginning on Christmas Eve 2018. As I wrote at the time, markets were massively oversold, and macroeconomic fundamentals, if anything, were surprisingly strong. The result has been a 37.7% return on the S&P since that time. It wasn’t until Q2, Q3, and Q4 that money began flooding back into equities. Once again, major market participants missed the boat, paralyzed by fear; fixated on a trade war that has not substantively changed anything; worried about equity valuations and froth; and/or some combination of all of the aforementioned. Fear of missing out is real, and palpable these days.
And so, it seems, we have come full circle. Equity markets are exuberant as we continue to rally. Q1 2020 sets up to be frothy, much like Q1 2018. Will macroeconomic data weaken, as it did then, pulling the rug out from the overzealous? Will an ill-considered tweet give participants a reason to consolidate their gains and run, once more, for cover? Will the collective conclude that U.S.-China trade agreements are neither lasting nor substantive? Or will the rally power onward?
My best guess (and, as I always disclose, our fund is non-discretionary, so take it only as a guess), is that we’ll see a repeat of early 2018. While we remain long on equities, we are not currently investing cash on hand. I expect a strong run to start the year, deflated sooner or later by weakening macroeconomic data. Presently, our model puts the odds of a correction in the next six weeks to six months at 23.88% to 49.93%, respectively. For most investors, this is an elevated level of risk that begs the question of whether the payoff is worth hanging on until the last possible moment. For most investors, however, the fear of missing out, and the temptation to try to be the second to last person holding the bag, will be too much.
Rinse and repeat. Say what you will about the markets, but trader behavior is nothing if not predictable.
This piece is purely editorial, reflecting only the opinions of the author. It is not representative of Deep Data Financial LLC or Meadowlark Financial Technologies LP. It is not, and should not be taken or interpreted as, financial advice.
Disclosure: I am/we are long SPXL.