After Relief Rally, 3rd Strike or Out? - Weekly Blog # 889

 

 

 

Mike Lipper’s Monday Morning Musings

 

After Relief Rally, 3^rd Strike or Out?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

Preparing for Rough Seas Ahead

We had a “Relief Rally” up to the close of the US stock market on Friday. Although most stocks rose, there was a change in leadership. Many of the best performers were the kind of stocks an institutional equity player adds to a portfolio to soften declining performance in a down-market phase. The leaders did not have the characteristics of stocks leading a brand-new Bull market. Everything changed late Friday, with Moody’s* announcing the lowering of its credit rating on US Treasuries from AAA to AA1.

* Moody’s stock is held in client and personal accounts.

 

Not a total Surprise

In a May 8-13 Reuters survey, 54% of bond strategists were concerned about the “safe haven” status of US Treasuries, a critical benchmark for pricing global capital markets. In April the same survey had 47% concerned. This was not the first group of worriers.

 

Consumer confidence in May fell to the second lowest reading on record. Regarding Moody’s US Treasuries downgrade, S&P downgraded the US Treasury credit rating in 2011, as did Fitch in 2023. Thus, the move by Moody’s is the third downgrade or strike. The next critical question is the nature and length of the expected decline.

 

Moody’s Answer

According to Moody’s statement, US credit “retains exceptional credit strengths such as size, resilience and dynamism of its economy and role of US dollar as global reserve currency.” Not surprisingly, the US government’s view is that Moody’s is looking backwards.

 

Expecting this retort, Moody’s focused on expectations for the future. They expect the Federal Deficit to reach 9% of the US economy in 2035, up from 6.4% in 2025. Furthermore, they expect government revenues to remain broadly flat, adjusted globally from negative. (To me this sounds like stagflation, with both tax rates and inflation rising.)

 

My Call

Odds are, we’ve struck out and ended the inning, but not the game. The absence of a structural recession/depression may keep an expansion in the low to middle gains. Portfolios with over 10% in longer than 10-year Treasuries should cut them in half.

 

How do you call it?

 

 

 

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A. Michael Lipper, CFA

 

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Odds Favor A Recession Followed Up by the Market - Weekly Blog # 881

 

 

Mike Lipper’s Monday Morning Musings

 

Odds Favor A Recession Followed Up by the Market

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

                             

 

The Art of Security Analysis

Security analysis uses science but is not science. Using past statistical history of up vs. down markets, one can calculate the odds of a down market. The odds suggest something along the lines of one down-market for four up-markets. This math does not tell us anything about the amplitude of the next up and down phases. Where the art comes into play is searching past cycles to measure the varied amplitudes and more importantly the probable causes. Market moves in the minds of market participants are often tied to economic, financial, political, climate, and other elements. There is a human need to explain phenomena, so it is natural that in most cases investors and others attach some non-market element as the cause for the moment. In truth, while it is comforting to label the movement as being caused by some external force, no two market moves that are exactly alike. We cannot absolutely prove the cause with any certainty.

 

While professional analysts look at many causes, they are not really called on to make a judgement as to what is the next element that causes the movement. Thus, professional analysts often rely on the irregular rotation of up and down-market phases in commentary. Based on this principle, I am turning bullish because I believe for whatever reason we have entered a down-market of some unknown amplitude, which will be followed by an up-market, again of unknown amplitude. History suggests, at least in the US, the odds favoring a larger gain than the prior loss. To provide comfort, analysts attempt to find reasons to support this belief, which I will do without the absolute confidence I have found the motivating force of the eventual bull market. (Subscribers are encouraged to suggest other drivers.)

 

Too Much Weight on One Side

In one edition of a supposedly learned publication, there were three articles published with the headlines listed below. What are the chances the Financial Times is wrong?

• “How Low Can the Dollar Go”
• “Trump lunches full-scale assault on American elite”
• “An all-out assault on the rule of law”

Is there any connection between the authors and editors? This concerted view reminds me of the British Crown after they outlawed slavery commercially while British merchants supported the US Confederacy. Did their support have anything to do with the import of US cotton to fill their clothing factories?

 

The Future

It seems commercial motivations override political principles, which is true today. While politicians throughout the world are concerned about factory employment, they do not favor the economically larger consumer marketplaces. I find it interesting that the two largest consumer markets are China and the US, which don’t have politically powerful unions representing them!

 

On this side of the pond, Barrons Weekly published the stock market performance of 28 national indices showing 14 European countries leading as well beating the US local markets.

 

In the US it was the first week our indices were up a bit. However, it was not true for the bulk of our stocks. Friday’s gain, particularly on the NYSE, probably had more to do with the expiration of options.

 

By definition, a stock owner is future oriented and usually expects others to pay higher price/earnings ratios for their stocks in the future. The depth of the bear market will depend on whether P/Es’s hold and if their prices decline in line with earnings or rise in a cyclical recession or collapse in a structural one. I don’t know which type we will suffer, although many of the current administration’s moves appear to be more structurally focused.

 

The World keeps on producing products and services that have the potential to change economic patterns. Three recent products come to mind:

               *New lower cost airliners

               *BYD’s fast charging batteries

               *Florida’s leading the way to lowering property taxes

What do you think?    

 

 

 

Did you miss my blog last week? Click here to read.

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To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.