Equity Markets
S&P 500 and STOXX 600 – It’s over, the bull market that is. Or at least it will be by the end of 2019 (and probably well before that). The valuation story has been the bears’ only hat to wear for the past three years, explaining that whether looking at the Shiller CAPE, the Buffet Index, or Tobin’s Q Ratio, all of them have been at levels only seen twice before, in 1929 just before Black Monday, and in 2000 just before the tech stock meltdown. In fact, all three of these are higher than levels just before the 2008 financial crisis. But valuations are not enough to drive markets by themselves. Other catalysts are needed as well, and in 2019 those catalysts are set to appear. The biggest are rising interest rates and reduced liquidity courtesy of the Fed’s monetary tightening.
2018 earnings were flattered by the corporate tax cut, which showed comparisons to 2017 in a very favorable light. In 2019, however, the comparison will be significantly more difficult, and earnings growth will be much lower - single digits at best. Another recession will be along again, and my fear is it will occur before 2019 is out.
WTI – Keeping with the theme that 2019 will be the year the recovery ends, oil will be similarly impacted. Competing issues in the oil market are on the supply side: whether Saudi Arabia, Russia and increased US production will be sufficient to offset the decline expected to be seen from Iran (because of renewed US sanctions) and Venezuela (as the infrastructure continues to crumble). If this remains the case a supply shortage will not be there to support the price of oil. On the demand side, if the forecast of slowing global growth and an incipient recession are correct, look for demand to slow substantially, tipping the balance and resulting in a price decline of between 15%-20%.
Bitcoin – Trading volumes have declined significantly since the peak in 2017, and interest in the entire cryptocurrency space is waning. Will we see this trend continue, or will Bitcoin serve as a sort of “digital gold” and be seen as a safe haven asset? The evidence points to the former. Despite the advent of Bitcoin futures markets, and the nascent Bitcoin derivatives markets, it remains a niche item, outside the mainstream for institutional trading. Also, if the economy does head into recession, it is more likely retail investors will be simply selling everything they own rather than looking for something to buck the trend. If Bitcoin loses the retail investor, then it has no one left. All this points to a further substantial decline in Bitcoin, as much as 30%, and I think I am being generous.
Andrew Fately is chief strategist at 9th Gear Technologies, the only B2B institutional marketplace that enables same day Foreign Exchange (FX) transactions with a peer to peer lending capability. Andrew has over 35 years of experience in capital markets across trading, sales and management roles at major Wall Street and U.K. financial institutions.