Bear market rally? Or the real deal

Jeremy Schwartz, CFA, Executive Vice President, Global Head of Research, WisdomTree

In a recent “Behind the Markets” podcast, Liqian Ren and I hosted a macro-focused episode, discussing both the latest political events and the global macro environment with Greg Valliere, Chief U.S. Policy Strategist for AGF Investments, and Simon White, managing editor of Variant Perception.

Trump avoided another government shutdown at the last minute in reality TV style while also declaring a national emergency to build his border wall. Valliere believes this will go all the way to the Supreme Court to be decided.

We also discussed the trade deal with China. Trump knows he needs a happy stock market to get re-elected, and the markets clearly are pushing him to a deal, likely sometime this spring.


Political Risk

Valliere believes the “next political crisis” will come from Robert Mueller’s investigation. He sees more indictments ahead that will raise political uncertainty for the markets.

Valliere’s worldview: while a lot of noise and craziness emanate from Washington, the underlying fundamentals are in good shape.

He sees modest inflation, a tremendous employment market, modest GDP growth and good corporate earnings despite all the dysfunction in Washington.

Variant Perception

White consumed research from the big banks when he was a proprietary trader and noticed there were flaws across this research.

He described Variant Perception, an independent research firm, as a group of generalists focused on delivering an “outsider” perspective with a data-driven, indicator-based process that is not a subjective “guru” insight.

More Pain

Currently, asset markets are telling a strong “reflation” narrative, predicated by strongly rising equity markets driven by lower interest rates and tempered Federal Reserve (Fed) rate-hike expectations, yet nothing on Variant Perception’s indicator dashboard confirms this view.

Rather, Variant Perception sees recent gains as a bear market rally with even more pain to come.

Recession Watch

Variant Perception believes recessions are caused by feedback loops between soft data (such as market data and survey data like ISM reports) and hard economic data (such as initial unemployment claims and GDP reports).

The end of 2018 witnessed very stressed soft data, and antennas are watching for hard economic data to follow suit, which would create a feedback loop compounding sentiment and economic survey data even further.

Variant Perception’s leading indicators for the world outside the U.S. were pointing negative for much of 2018, with only a few pockets of the U.S. actually being negative: autos, manufacturing, and housing—the more interest-rate-sensitive segments of the market.

The Fed

The firm believes that is changing for 2019, and now the U.S. indicators are pointing even more negative.

Monetary policy acts with long and variable lags, so the three years of hikes from the Fed are now affecting the economy while its balance sheet is also contracting.

The European economy is slowing down primarily because of Germany, and Germany is ultimately being affected by China slowing down. White does not believe Europe will regain momentum without China picking up as well.

Please listen to our full conversation with Simon White and Greg Valliere below.

Versions of this article first appeared on the WisdomTree blog and SeekingAlpha on February 20, 2019.

Photo Credit: SteFou! via Flickr Creative Commons

Disclosure: Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. WisdomTree believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

About the Author: Jeremy Schwartz, CFA, Director of Research, WisdomTree Asset Management is responsible for the WisdomTree equity index construction process and oversees research across the WisdomTree family. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” Jeremy is a graduate of The Wharton School of the University of Pennsylvania and currently stays involved with Wharton by hosting the Wharton Business Radio program “Behind the Markets” on SiriusXM 111.