After strong reports from the likes of CSX and Morgan Stanley, equities largely rose in yesterday’s trading session. The Dow Jones Industrial Average advanced by 79.40 points, or 0.3%, to 25,199.29, with the blue-chip gauge’s fifth positive session marking its longest winning period since the eight-day period ended May 14, 2018. The Nasdaq was the only index in the red and by barely a point.
Morgan Stanley shares rallied 2.8% after the investment bank reported second-quarter earnings and revenue that rose above expectations, boosted by outperformance in its sales and trading business. What might be odd about Morgan Stanley’s strong quarterly report is that the firm’s economists and equity trading strategists believe the market is in store for a rocky road ahead. We’ll get to that in a bit, but not before a strong call from one of the markets most contrarian indicators, Dennis Gartman. In a recent article by ZeroHedge, the infamous commodities king made another bold call. Before we get to that call, only a month or so ago, Gartman was touting a collapse for equity markets and even positioned himself short the S&P before covering this position at a loss. That missive can be found reported by ZeroHedge in the linked article. Additionally, worth his weight in gold, the commodities king Gartman predicted it would rally in 2018. Gold incidentally, is down about 8% since the beginning of the year. There is still some time for this call to come to fruition, but gold closed yesterday at its lowest levels of the year and is currently heading lower.
Excerpts from Gartman’s latest missive, were posted Wednesday on Zero Hedge. They laid out a scenario in which the blue chips break out to record highs.
“If these past 6 ½ months are indeed going to prove to have been a consolidation phase,” Gartman was quoted as saying, “then huge gains, perhaps sufficient to carry the Dow to 30,000+ … as exaggerated and as stunning as that may sound… is technically possible.”
This is a global event that is taking place: a possible global consolidation that is now breaking out to the upside. Certainly, it is possible.”
ZeroHedge noted it wasn’t long ago Gartman sounded a lot more bearish than he does now. And by “not long ago,” we’re talking earlier this month when he advised readers that “this is now a bear market; trade then accordingly.”
Gartman has had an uncanny knack for being on the wrong side of the equities market trade for quite some time, so investors would likely be wise to take the commodities king verbiage with the grain of salt. Nonetheless, his commentary might be worth noting and considering as a contrarian indicator. Time will certainly tell!
Other economists and strategists have a different take than that of Garman’s. Invesco market watcher Kristina Hooper believes Wall Street should brace for trouble.
“We could see another about 10 percent sell-off, and it could happen relatively quickly or it could be a bit more gradual this time – sort of death by a thousand slashes potentially this fall,” the firm’s chief global market strategist said Tuesday on CNBC’s “Futures Now.” “I wouldn’t be surprised to see a significant sell-off in the second half.”
A study, which Invesco commissioned through global market research institute GfK, surveyed more than 800 advisors and 1,015 investors in both January and April. The objective was to compare the sentiment of individual investors to advisors.
Despite her warning, Hooper doesn’t expect the S&P 500 to permanently shed gains for 2018. Her year-end price target is 2,850 to 2,950, which represents a 2 to 5 percent gain from current levels.
While Hooper’s warning has a 50/50 chance of coming to fruition it may rest in the ominous lining of the trade dispute between the U.S. and it’s trading partners around the globe. Little has been chronicled in the media concerning the trade war in recent days, but investors should expect the subject matter to flare up again and sometime soon.
Equity markets could continue to express fits and starts along the calendar year, but the fits are likely aligned with trade concerns, Fed rate hikes spurring inflation fears and the yield curve inverting as a historical tell tale sign of an impending recession. The starts for equities are aligned with a strong and strengthening economy that is producing and expected to continue to produce strong corporate profits through year’s end and into the first half of 2018. With this being said, there’s no telling what mid-term election times might bring and the Yuan weakness, which hit a 1-year low overnight. There’s a great deal more active traders need to pay attention to in 2018 when compared to 2017. Long-term investors are likely able to rest soundly as markets historically follow earnings over time.
With roughly a week worth of earnings in the satchel, equities have thus far responded positive to better than expected earnings. The big banks have reported a mixed bag, but the financial sector has actually performed relatively well. The Financial Sector Select Spiders ETF (XLF) rose sharply in yesterday’s trading session, again, after Morgan Stanley’s strong report.
As one can see from the chart, the XLF finished at a 1-month high yesterday. But while Morgan Stanley is benefitting from higher rates and a strengthening economy, the firm’s chief U.S. equity strategist Michael Wilson, on Monday wrote that while the season should come in ahead of analyst forecasts, “we do not see it as a positive catalyst for the U.S. equity market.
“The growth outlook for the rest of the year remains strong, but that is not enough to make us bullish headed into this earnings season. We think the market will increasingly have to focus on the sustainability of growth and with future comparisons getting harder, economic growth due to slow in [the second half of the year], the dollar tail wind to EPS dissipating, and commodity and operating costs moving higher, we think the current level of growth boosted by a one time tax benefit is likely to fall significantly.”
The investment bank has recently been ringing the warning bells about stocks, saying that investors would soon take a turn for the defensive. Last week, analysts at the investment bank downgraded both small-capitalization stocks and the technology sector, two of the market’s biggest outperformers thus far this year. It also upgraded its view on both the telecommunications and the consumer-staples sectors, two industries that tend to hold up better in periods of economic uncertainty.
When it comes to Morgan Stanley’s equity market outlook on the year, the firm does not see much upside from current levels. Morgan Stanley doesn’t expect activity in the U.S. economy or others to rise further as we are in the late cycle of the bull market. It has set a target of 2,750 for the S&P 500 in the next 12 months, and expects the index to peak at about 2,825 this year, but not much higher. Trade tensions are expected to impact the economy offered Michael Wilson.
“Our suspicion is that this rally may prove to be a bull trap that provides the perfect opportunity to position more defensively. … We think [the jobs report] will likely encourage the Fed to continue to tighten and may encourage the administration to continue to take a strong stance on trade issues.” He added, “After all, economic data like this suggests the trade policies are successful. Neither of these potential actions is good for equity markets in our view.”
It remains to be seen whose forecast/outlook finds favor in the market amongst the noted analysts and strategists. While the warnings and exuberance are offered with varied supportive logic, ultimately there is only one determinant for equity markets long-term, earnings! Those earnings may find the market actually lagging earnings performance more so than in previous eras given the heightened state of geopolitical factors, but eventually the catch-up trade would likely be found. Finom Group has been beating the earnings drum since the onset of 2018 and through the market’s correction. Over that time, the S&P 500 has found itself “catching-up” to earnings forecasts and realized results.