Markets near all time highs

The stock markets have been setting new all time highs in the last week. Where earlier on, the markets became slightly nervous and did tick down between 2 and 4%, the markets heavily recovered. There is a general consensus that on every dip the stock market needs to be bought. And no one wants to miss buying the dip. Till it does not work anymore obviously. The interest rates are low and the central banks do time over time indicate they will keep the rally going. They are ready to ‘safe’ the stock markets from falling aggressively.

Corona affecting GDP growth China

Meanwhile the Corona virus will have a strong impact on the China GDP growth. China’s first quarter GDP growth can easily be hit by at least 1% point which would bring it around or below 5% on a yearly basis. That is a weak growth for China. In the last weeks, the economy of China has been running on only 1/3 of the capacity. Also, figures from Germany are showing that a recession is a realistic scenario in Germany. Though, US economic figures and company earnings have been strong, indicating that the US economy is not turning down at all.

Markets ignoring the Corona virus

Currently the stock markets does price in that the Corona virus is going to have very little harm. Personally I think that that is not the case. China has the second biggest economy in the world and will have a very weak year. China’s growth is already weakening for a while and I do think that investors do need to worry about the Corona virus. At least more than what they do know. People do all the time compare Corona with SARS. But in 2003 the Chinese economy was only 1/3th of today’s economy. During SARS the stock market did experience a heavy shock initially of 8-10%. I think we will still see a shock of Corona in the financial markets, when investors are going to assess the damage it has done and will do to China and the world economy. For the longer term I do not see many problems, but on the short/medium term I think it makes sense for the stock markets to do care. For some investors it might be a moment to take some profits and move to the sidelines.

These kind of situations will always bring nice opportunities as well. Quite often we see that in a market downturn all stocks, also the very good ones, might suffer significant losses. This brings strong buying opportunities.

Downticks on Corona

Like with Sars in 2003, the Corona virus started to affect the financial market significantly in the last week. The Corona virus has grown rapidly over the last week. On the 24th of January there were 941 reported cases, currently there are over 11k people infected. And according to scientific models, the amount of people carrying the virus might already be above 75k. Due to the incubation period of 14 days and people that are not being reported/investigated yet, the number might be much higher than the official reports which say just over 11k. See below that the Corona virus is so far mainly sticking to the mainland of China. Let’s hope it does not spread further in large numbers.

How the outbreak compares with SARS

During the SARS outbreak, 774 people died. Most of them died in mainland China and Hongkong. Currently the spreading of Corona goes much faster than the speed of spreading of SARS. In the end, ‘only’ 8098 people were infected with SARS. Corona will go far higher than that. The good news is that the mortality rate of SARS might be much higher than we will see with Corona. The death rate with SARS was nearly 10%. So far the Corona virus gets to a death rate of 2.1%. But one should not forget that people who are currently infected might still die because of the virus. The death rate of Corona will because of that creep up further.
Two main questions for the upcoming weeks are to see how quickly the virus keeps spreading and what death rate is represented by the virus. Currently there is a lot of uncertainty around this.

Why are the financial markets falling?

The virus has started impacting countries, companies and with that the economy and the financial markets. Lots of countries and companies have taken action. For example, Lufthansa has cancelled all flights to and from China till at least the 9th of February. Another example is Starbucks, Ikea and Apple closing stores in China. Trade with and within China will be harmed on the short term. This has an effect on companies that do business with or in China and will dampen their revenuues and profits. This is spooking investors and causes the market to fall. The market does not like uncertainty and we currently see a correction happening. Stock markets are always forward looking, so when at some points it seems that the tide is turning, the markets will recover rather quickly. Reasons for that to happen could be that the speed of spreading the virus goes down quickly, some kind of vaccine is ready to be used, the majority of the virus stays in China, et cetera.
With SARS we saw the same. The market panicked and the S&P went down around 8% within weeks/months to recover heavily after uncertainty of the virus decreased and it seemed that SARS was getting under control. The S&P traded just after the SARS virus higher than it was trading before. Most likely something like that will happen again. In case the Corona virus worsens the upcoming weeks, a retreat in stock markets of up to 5%-7.5% seems possible. If the Corona virus is being dealt with, the stock market will probably recover the complete downtick.
The upcoming week volatility will stay high. China’s stock market will open again, and it will be very volatile on it’s first day. Probably opening around 8-10% down. The focus for this week is to see whether authorities have been able to keep the disease mostly in China or not. Do we get large outbreaks outside of China?
To be continued.

Corona Virus & Davos

In the last week, there were two interesting topics. One was planned, the other one obviously not. I am talking about the World Economic Forum in Davos and the outbreak of the Corona virus in China.

World Economic Forum (WEF) in Davos

Since 1971, when the event was created, the event has happened every year in Davos. Davos is a mountain resort in Switzerland. Around 3000 business leaders, international political leaders, economists, journalists, et cetera gather at Davos for five days of discussing global issues. The WEF is funded by over 1000 companies. The theme of this year was: stakeholders for a cohesive and sustainable world. WEF this year focuses on how to deal with climate change; mainly about how to get the carbon emissions down. Trump and Greta Thunberg are the symbols of this discussion. Trump is focused on the economy and job market and does not care too much about climate change. He does not really believe in it and sees dealing with the climate as a side job. Not as a main priority. Greta Thunberg is only 17 years old and became famous in 2018 when she was as a schoolgirl in Sweden striking day after day before the Swedisch Parliament. Her goal was to get more attention to climate change from politics.
Thunberg was at Davos as well. She has been stating over and over again that companies and the world are not doing enough to fight climate change. She is really angry at Trumps ideas. Trump finds the whole discussion funny and said: “she beat me out on Time magazine”. And he told her to focus on other countries than the US.
Anyway, most agree that we need stricter regulations and that we need focus on renewable energy. But there are a lot of different opinions on how far we need to go. We know that oil is needed for many more years and that we cannot go from fossil fuels to renewables overnight. It is a slow process and that needs to be accepted. The WEF in Davos is a useful event as it shapes new discussions and ideas and makes it easy for governments and companies to see where they are currently standing.
Though, there is no immediate effect on stock markets. These kind of forums are very long-term focused and are not expected to bring much extra day-to-day volatility.

Corona virus

The Corona virus has a more immediate influence on the stock markets. It is a disease that was unexpected and comes a bit out of nowhere. As far as we know now, the disease is related to the SARS virus that caught the world in 2003. So far 25 people have died from the Corona virus and over 800 people have been contaminated. The actual number might be much higher. Markets need to price in a certain most likely scenario. Calculating that scenario is very difficult. As such, markets might move on it. What asset does move the most on the Corona virus turmoil?
Oil has been hit the hardest. The reason for that is that China is closing cities. Currently there are already 10 (large) cities closed to the rest of China. To avoid that the disease spreads. Quite some airlines do not fly to the city where the disease was first discovered: Wuhan. The demand for oil is and will be hit by the virus. Less traveling means less oil needed means lower oil price. That is exactly what happened. Crude Oil has dropped this week from around $58 towards $54.50. A decline of 6%. As long as the disease is not contained well, oil price might remain weak. I have read some research reports that the price of Crude oil might drop towards $50 in case the Corona virus becomes a large problem.

To be continued.

De-escalation in the Middle East

After the US killed Soleimani, there was a fear that it could lead to a start of a war between Iran and the US. That fear seemed very overblown when Iran came with their revenge action. The revenge was nothing more than shooting some missiles towards at least two Iraqi bases where US military was based. They did not kill any US soldiers, neither did they damage much. It was a very weak revenge for the killing of Soleimani. It is very clear that Iran does not want a war.

War is in nobody’s interest

Obviously, Trump was happy with this weak revenge. Trump also has no interest in a huge escalation with Iran. He needs to get reelected, and these kind of Middle East wars have not brought much positive in the last twenty years. Trump killed an important terrorist and shows the American people that he is the boss and Iran cannot do much against him.

Commercial airplane shot down

Iran shot down a commercial air plane. It was very shortly after the revenge attack. Iran said they thought they were under attack by the US. They thought the US fired a rocket towards the regime. This was not the case. It was not a rocket, but a commercial airplane.

A disaster. 176 people died, of which many were Iranians living in Canada. A disgrace. Before the US found out that Iran shot down a commercial plane, Iran said it was impossible that one of their missiles hit the plane. Very stupid, everyone knows that this is easily checked with the satellites that the US has.

Did Iran really shoot down the plane unintentionally?

It is not unlikely that Iran shot the plane down on purpose. To get the people’s attention to a different topic. Away from the very weak revenge strikes after Soleimani was killed, towards the tragedy of an airplane that crashed near Teheran. Maybe the Iranian regime wanted to shift this war focus to a mourning focus and in that way easily get away with their military weakness. The regime is worse than worse and willing to do whatever they need to save their face.
It is not that unlikely, but obviously a stupid move. Would anyone believe that the airplane was not shot down after investigations would have been done? Currently, the Iranian regime has to deal with a new wave of protests. Previous protests regarding increasing fuel prices, they could blame on the US sanctions. For current protests there is no one else to blame than the Iranian regime. How are they going to deal with that? Are they again going to shoot down protesters? Maybe they need to shift the attention again to a different topic?

Stock markets relieved

The financial markets have been relieved by the de-escalation of Middle East tensions. Meanwhile the oil price showed a large decline during the second half of last week. Oil had spiked before as the Middle East is a very oil producing heavy region and a chance for a war could put a lot of pressure on the oil production and transportation.
For the moment I expect the financial markets to watch the Middle East situation closely, but to not worry too much. Unless an attack happens where the US suffers. I do not think the markets will be too upset by threatening words between the US and Iran. That is expected to keep on happening now and then. Last couple of days has made clear there is a huge difference between threatening language and an actual act of war.

Middle East tensions

Trump needs to keep his popularity among Americans at a high level, at least till November this year when he has a good chance to be reelected as president. The trade war is, just for a couple of months, a bit to the background. Trump has been looking for a next topic to gain popularity on and has found it: revenge for American victims in the Middle East.

Top Iranian general killed

In the night of Thursday to Friday, the US killed a top Iranian general, Soleimani, in a Baghdad air strike. According to Trump, Soleimani is directly and indirectly responsible for millions of deaths and killing an American on the 27th of December. Soleimani was a powerful man within the Iranian regime. Killing him is a strong symbolic statement to Iran and the world: the US is taking the Midde East situation very seriously and does not hesitate to escalate the situation if needed.

Oil price

The oil price moved up over 3% on Friday on the increased tensions in the Middle East. With the US shale boom, the Middle East is getting less and less powerful within the oil landscape. But still, the Middle-East produces around 35-40% of the total oil production. The oil price will increase much further in case a war with Iran will be started. Iran itself does not produce much oil anymore due to sanctions, but Saudi-Arabia and Iraq do. An increase in oil price is not per se bad for the US. The US is the top oil producer world wide and will probably increase production much more when Crude Oil peaks above $70.

Trump threatens Iran

Trump threatened Iran with targeting 52 Iranian sites in case Iran hits any Americans or American assets. Iran took 52 American hostages many years ago and the 52 targets have in that way a symbolic meaning. Trump says to hit Iran very hard in case Iran further escalates the tensions. This way of speaking we know from Trump and often not much happens. Maybe it is different this time, who knows. Iran is expected to somehow retaliate at some point. They will not hit the USA directly but probably indirectly by attacks in Iraq, Israel or Saudi Arabia. They might finance terrorist groups with extra weapons or money to target US assets.

What would extra attacks mean for the stock market?

Stocks normally initially get into negative territory when people fear a war and when the war starts. Though, during the wars, stock markets have performed well. A significant dip of over 10% on some kind of Middle-East war, could most likely be seen as a buying point. In the last gulf war, the S&P initially lost over 14% and recovered very strongly after. If the US and Iran get into a full-blown war, which is still unlikely, there is no need to worry about the stock market. Initiatlly there will be a shock, but over the span of 1-3 years there is no reason to expect an underperformance. In the past, the S&P has even outperformed in periods of war! Even during World War II, the S&P posted gains!

Looking back and forward

The year 2019 was dominated by

  • US – China trade war
  • Weak manufacturing data and the fear for a recession
  • Dovisch central banks
  • Brexit negotiations
  • Towards the end of the year: diminishing uncertainty around some of the above main topics.

2019 was a good year for stocks. When we look at the S&P, we see that the return in 2019 is around 28%. The end of 2018 was really bad for the markets and just before Christmas 2018, the market did crash heavily. These losses came back quickly in January 2019. We should not forget that 2018 was a bad year for stocks. Though, 2018 & 2019 together posted above average returns. An investor in the S&P starting at the 1st of January 2018, would have made 9.5% annual returns till today. That is a bit above the long term average and also quite a bit higher than the returns we have seen in Europe. The S&P outperformed.

S
S&P 500

Predicting a recession would have been expensive

Maybe for every investor, but definitely for the average investor: trying to predict a stock market crash is very difficult. On average, the stock markets gives you a 8% return for being long. When you try to predict a market crash, your timing is essential. If you think it will happen next year and it only happens in 2024, you already miss 4 years of on average 8% returns. Then the market has to crash very hard to make up for that.
Peter Lynch, one of the most well-known investors of all times quoted it nicely:
” Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
When you take a bit of time to think about this, I think you would agree.
At the end of 2018 and in the beginning of 2019, quite some investors were talking about a recession and the high likelyhood it would happen. They based their opinion on the geopolitical tensions and the inverted yield curve. But then the market overcame these tensions and the central banks became very dovish again. The FED does not want stock market turbulence and the ECB still needs to get the inflation back in the economy. Moreover Trump closed a first deal with China. The market is dynamic and somehow it always finds a way back up. Crises like the one in 2008 are rare but still in the memory of people. But if you would have bought before the crisis in 2008 and kept your stocks during the crisis and still owe them today, you would have made a satisfying annual return of nearly 9% and your investment nearly trippled in value!

2020 to be dominated by US elections

Currently the stock market sentiment is very good and is expected to stay good for a while. Trump cannot risk significant market turbulence and wants to boost the economy once more: to get reelected. Moreover, profit margins for companies are high, unemployment is low and there are no significant structural/system risks in the money system at the moment.
The market can react heavily in the short term on a Democratic presidency. Democrats are being seen as negative for stocks while Trump is being seen as relatively good for stocks. Especially if Bernie Sanders or Elisabeth Warren would become president, the stock market might sell off heavily just after the elections.
Though, on the longer term it has been found that it does not matter much for the stock market if a Democrat or a Republican is in power. Depending on their policy it can matter for certain stock sectors, but for the stock market (S&P) as a whole it does not matter much on the medium/longer term.

Long term message

The long-term message is: do not try to outsmart the stock market and stay invested with the money you do not need on the short term. It is as easy as that. Make sure you diversify the portfolio and understand the risks.

Green light for stocks

Last week has been an important week for the stock market. Two main topics have been adressed in a positive way: the UK elections and the trade war between the US and China.

UK elections & Brexit

Boris Johnson won the UK general elections by a landslide on Thursday. He gained a massive majority in the UK parliament. He should easily be able to get the Brexit deal, that he made with the EU, through parliament. The stock market was happy with his victory and so was the Pound.
The chance of a hard Brexit has really diminished now and companies that deal with the UK will feel a relief and can actually focus again on the long term business activities.
Going forward, in the upcoming months/years there will be a transition period in which will be negotiated how the Brexit will be dealt with. For example, there have to be trade agreements between the UK and the EU. Next to that, the UK gets all the freedom to make own trade deals with other countries like the US. On the longer term this Brexit might well work out very nicely for the UK.

Trade war Phase 1 deal

The US and China have agreed on a so called Phase 1 trade deal. New tariffs that would start on the 15th of Dec are being halted but the previous 25% tariffs remain. In return China has agreed to some structural changes and large purchases of mainly agricultural goods. This de-escalation of the trade war helped the financial markets move up. Trump and China also agreed to start the negotiations on a Phase 2 deal very soon.

Lots of market uncertainty gone

With Boris Johnsons victory and the trade war Phase 1 deal, quite a lot of concerns on the world wide economy have disappeared. With money being very cheap and geopolitical risk diminishing, stocks do have more upside potential.
Trump will probably not take much risk going forward and needs the economy and stock market to do well running into the US elections in November 2020. The upcoming 6-9 months are expected to be months with lower volatility and interesting returns.

New highs & US elections 2020

The US stock market volatility is coming down and new highs have been reached this week. There is continued optimism that the US and China are getting closer to signing off the ‘Phase 1’ deal. Moreover, economic data remains solid.
The week was very queit with on Thursday Thanksgiving. Every Thanksgiving 46 million turkeys get finished by the Americans. Enough reason to close the stock market that day.

US elections November 2020

The upcoming year has one big central topic: the US elections. The main question is, can Trump get his second term as president? Quite a bit depends on how the economy and the stock market will perform in 2020. So far, Trump chances look good.

40%

Based on the polls, Trump has a over 40% chance to get reelected. The democrats have not yet one candidate of which you would think, wow that person is going to give Trump a hard time. Who are the main contenders on the Democrat side? In order of likelyhood of becoming president (on betfair):

  • Joe Biden (12%)
  • Pete Buttegieg (10%)
  • Elizabeth Warren (7%)
  • Bernie Sanders (7%)
  • Michael Bloomberg (5%)

Joe Biden (77 years) currently has the highest chance, but the whole story with Ukraine and his son has not really helped Biden. Biden is a reasonable guy who has reasonable economic ideas and is not a danger to the stock markets. He is there for the middle class which he likes to ‘save’. He is not that much of an activist that wants to destroy the wealthy and save the environment at all cost. Joe is the most market friendly Democrat.

Pete Buttegieg (37 years) is the newcomer and his main advantage is that he is only 37. And probably the only Democrat candidate that would survive two presedential terms :). The others are all 70 years or older. Pete is openly gay, a millenial and a war veteran. Quite a nice profile for a president. He is quite an environmentalist and wants to tax the rich most. But he is not that extreme in these views. Pete is pragmatic and the financial markets would not dislike that.

Elizabeth Warren (70 years) is the Robin Hood of these days. She is very extreme in her thoughts and a real environmental activist. The financial market and the US economy would not like her to become president. She wants to ban all fracking which would kill the US oil business and heavily harm the US economy. She also wants to let the rich pay for all the medical care in the country. Her extreme ideas are currently backfiring her in the polls. She will probably lose more ground and have not that much of a chance to become president.

Bernie Sanders (78 years) is old and he recently had a heart attack. His health situation is probably not gonna help. Moreover he is bad for the financial markets and a bit in line with Elizabeth Warren. Bernie should retire and enjoy his last days, but not focus on a presidency.

Michael Bloomberg (77 years) is a business man and one of the wealthies guys in the world. Bloomberg was a Republican in the past and now is a Democrat. He was the major of NYC and will know how to run a country like the US. He would be a very interesting choice for the economy. He has a tremendous amount of money, so I expect him to use that to climb in the polls.

In February there are many Democratic primaries where we get more insight on who will become the Democratic nominee for the US elections in November 2020.

Slow silent trade war

Trump and Xi are openly not well communicating about the trade war. Xi is mentioning that China and the US should strengthen communication on strategic issues to avoid misjudgement. Trump on the other hand keeps on claiming that China really wants to make a deal and that the US does not need to, only if it is a great deal for the US. Trump is also not clear what will happen to the possible new tariffs that start on the 15th of Dec.

There is uncertainty around the trade war but the markets do know this. It would limit a bit the potential for much further upticks. On the other hand, strong downticks can definitely happen. But the low interest rates and the active central banks will probably keep the stock market going fine. There is just not an interesting alternative for investing your money in stocks.

Next to that, Trump is also getting pushed around a bit by CEOs of the big US companies. Tim Cook from Apple has had many discussions with Trump. Trump understands his tariff actions might hurt the US economy and their big companies quite hard. Trump currently thinks about a possible tariff exemption for Apple. Where Trump was very impulsive in the beginning of the trade war, it seems he is using a bit more rationale last weeks. He probably finally experiences that his implusive actions do not always help the calmness and the quality of the stock market and the US economy.

Tesla’s Cybertruck

Silent markets, but something more interesting was the presentation of Tesla’s electrical truck. Elon Musk presented this Cybertruck that should get on the market in 2022 or so. If Tesla is still solvable at that time… The truck gets to 97km/h within 2.9 seconds, should be more or less impossible to destruct and should be able to tow up to 6350 kilos. Moreover one should be able to drive 400kms on a full charge. Watch the video below and enjoy. Some people believe it is a joke. You never know with Mr Musk.

And if you have some more time and money left, why not check out the latest opportunities in the stock market?

Bye bye, Draghi

Last Thursday, it was the last ECB meeting under president Draghi. Draghi is well remembered for his phrase: ‘whatever it takes’ back in 2012. At that time he wanted to turnaround the euro crisis. Draghi is the first ECB president that never raised rates. With massive Quantitative Easing (QE)programs and uncountable amounts of rate cuts, Draghi has been trying to keep and bring back the inflation in the eurozone at satisfying levels. He has not succeeded in that goal. Some people say the rate cuts and the QE programs did not work at all. I think they probably did work. Without them we might have been in deflation and thanks to Draghi we still have some inflation and an economy that is still quite strong.
Trump is a massive fan of Mario Draghi. Trump wants lower rates and has the opinion that the competition with Europe is not fair, as in Europe governments can borrow money for negative interest rates. Trump probably dreams of firing Powell and hiring Draghi, but Trump will probably not do ‘whatever it takes’ to get negative/very low interest rates

Stocks have been on the way up

Stocks have been rising for three weeks in a row now. Before this week, there had been positivity on the Brexit developments and in the last week the markets seem to have started an end of year rally already, There has been some rumors and reports that the US and China are actually getting closer to sign the partial trade deal that they had mostly agreed on earlier. The S&P 500 is nearing a new high and the NASDAQ has actually reached a new record.
As some earnings, like those from Amazon, have been worse than expected, investors do think that there is no decline yet in the technology growth and are getting more optimistic about the stock landscape again.

Fed can make or break the upcoming weeks

Within days of each of the previous five Fed meetings, stocks have had serious declines.

There was some fear in the markets after the last Fed meetings that the Fed was not doing enough or might be too late in reacting to the trade war escalations. As the trade war escalation has stopped for now, the Fed is still generally expected to cut the rates next week. In case the message they give with cutting the rates is dovish, a nice end of year rally might follow and can bring stocks finally to significant higher levels than we have seen in the last two years. The S&P might be close to a high, since Jan 2018 the Index has been struggling to choose a direction.
Stocks might struggle after the Fed meeting in case Powel signals that the Fed will go on hold for a while. If so, it could mean no more rate cuts are likely for the upcoming time. Rate cuts are generally good for stocks as the yields in bonds and interest rates on banks decline. To fight for yield, stocks get more attractive. Companies can borrow money cheaper and accelerate profitable growth.

Oh yes, Brexit

In the mean time the markets are also waiting for the EU to give the UK an extension on Monday for their exit time. The extension is very likely, the question is how long will the extension be? Most likely it will be an extension of a couple of months. In that case, Boris Johnson will probably call elections that will be held before the end of the year.