Investing is all about balancing risk and reward. There will never be a magic formula that spits out a buy or a sell with full 100% guarantee. There will always be known and unknowns. The job of an investor is to navigate through the sea of information and decide whether it's worth taking the risk to invest with all the knowledge at hand.
Back in December, media and sellside commentators were swimming in the idea of doomsday and recession, suggesting clients unwind their portfolios when the S&P 500 traded at 2400. Hmmmm, what would we do without private bankers and financial advisors? How this industry has survived all this while baffles me, especially given their lucrative high free structures for mediocre performance and lack of individual thought.
Two things have changed since the start of this year that has helped the market rally from the lows: Fed Powell's dovish u-turn and the Chinese central bank pumping record amount of liquidity into the system. To the former point, it is astonishing that the Fed was at three rate hikes the last time the S&P 500 was at these levels, where currently it is on hold and leaning towards more quantitative easing policies. Something does not add up.
The fact of the matter is that the Fed has no clue what the outcome of U.S./China Trade Wars will be as it awaits the end deal as eagerly as the investors. Other than give the market sweet talk, it can only frame a policy once this major unknown is known.
On Friday, we concluded the seventh round of talks held between the two parties since February last year. It seems both sides have been given a script to read, as the only words being uttered from both camps are "talks are going well." Trump -- as usual, unable to stick to the script -- decided to further confuse the market by saying "a deal could be done or not." Are we back to kindergarten tactics?
Trump and Xi Jinping are due to meet at the end of March. It seems the two parties are closer to seeing eye to eye on structural issues such as foreign company ownership, intellectual property theft and other points. However, until this morning, Trump did not clarify whether or not the March 1 deadline of tariffs would be extended or not. According to his declaration, tariffs would be raised from 10% to 25% on $200 billion worth of Chinese imports. Just a few hours before market opened, he reaffirmed this -- but with no firm date attached.
The S&P 500 has recovered from its oversold stance since December. It is flirting with the key 2800 level, off only 3.5% from all-time highs of 2018. Astonishing performance from the fourth-quarter 2018 nadir.
Let's put this rally into perspective. Global PMIs, ISMs, and other export and macroeconomic numbers have been appalling. Indicators are showing further slowdown and contraction in most countries. Of course once the data is reported, it is backward looking. But suffice it to say that the underlying backdrop is not strong. There is a big disconnect between what is really happening and what is being promised by the officials. But then again, investment is not about "hoping" for a return, it is about calculating the probability and forecasting a return.
The easy no-brainer bounce in the market is done. We failed to break 2800 last October and November. To break higher from here, the market will need substantially good and incrementally positive new news, beyond just "talks are going well."
A lot of asset classes seem closer to fair value than "cheap" right now. Commodities like copper and oil are still tight markets, as inventories are more finely balanced now. But the risk/reward is not as lucrative as back in January. Copper has rallied from $5800/tonne to $6500/tonne today, and oil has gone back up to $67/bbl from $52/bbl. It is time to close the longs, take profits and sit on the sidelines for now, awaiting a better entry point. If we get a deal, together with the Fed being accommodative, we can reach new highs -- no doubt.
But for now, the risk/reward seems a bit more asymmetric to the downside, especially given how much hope is built into the markets without an actual improvement in the economies. Investors feeling a sense of FOMO (fear of missing out) will be better advised to wait, as there is no point in chasing it now until the bigger picture is less clouded.