Rally could be selling opportunity ahead of potential Trump bear market

The big question facing global investors is how Wall Street will perform in the medium and long term now that the mid-term elections are over. Performance of the faltering FAANGs is the key, as these stocks have provided most of the market’s momentum.

So far equities have rallied as the elections have met expectations, notably that the Democrats are now in control of the House of Representatives and the Republicans have retained the Senate.  Market participants could get a rude awakening if they believe Trump’s spin that he’ll get legislation through the house. His infrastructure plans might be accepted, but environmental and other deregulations are likely to hit a brick wall. Democrats will also hamper Trump’s ability to govern as he’ll be bogged down in defending his tax returns, possible business conflicts of interest and allegations relating to links with Russia.

The Economy is already slowing despite Larry Kudlow’s claims

During the third quarter, the economy grew by 3.5 per cent compared with 4.3 per cent in the second. The projection of most economists is that the economy will slow down slightly. Lacy Hunt of Hoisington, a specialist fund manager in US Treasuries, is more pessimistic. Hunt, who has a good track record, contends that the US economy “appears to be on a steadily declining path to recession and disinflation/deflation.” GDP and unemployment numbers carry little weight regarding future economic activity, contends Hunt. Instead, it is monetary policy that has played a major role in determining recessions.

The government’s debt level has reached such extreme heights that it will also restrain future economic growth, maintains Hunt.

“An analysis of these factors leads to the inescapable conclusion that a bumpy landing is in store for the U.S. economy.”

Larry Fink, BlackRock chairman and chief executive also contends that the massive US federal deficit, which is projected to exceed $1 trillion next year, will hurt equities.

If Hunt and Fink prove to be correct, equities could well slide in the first half of 2019. To be sure the rally already appears to be faltering.  A major slide, however, could encourage the Fed to cut rates again. The aim would be to generate a rally to help Trump begin his re-election campaign. In those circumstances, the dollar would weaken.

Bargains after the slide?  Careful!  See the long-term perspective down the page.

Expensive FAANGs have lost their momentum

Since Trump was inaugurated as President, the market has become increasingly dependent on the runaway performance of the so-called FAANGs.  It appears, however, that the fizz is leaking from the FAANGs’  balloon.  Since their all-time 2018 peaks, Facebook has tumbled by 31 per cent, Netflix by 25.3 per cent, Amazon by 18.7 per cent, Alphabet (Google) by 16.8 per cent and Apple by 12 per cent. Microsoft, another favourite is down 6 per cent.  These shares are still expensive. Following the latest four quarter results, Netflix’s price-earnings ratio is a whopping 116, Amazon, 103, Google 27, Microsoft, 25, Facebook 20 and Apple 17. Schwab, the US broker still rates Microsoft, Google and Amazon a  buy but the firm does not believe that expected 2019 earnings justify the PEs of Apple and Facebook. They are rated a “hold” and  Schwab reckons that Netflix is a sell.

Prices have hardly fallen from bubble peaks

© Copyright Neil Behrmann

 Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.

See reviews of both books on  https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

 

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