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Macroeconomics

25 November 2019

SECOND GUESSING UNTIL THE NEW YEAR 

This week traders in the US will enjoy a shortened trading week, due to Thanksgiving and Black Friday. Trading will slow down from Wednesday afternoon and on Friday most trading houses will work with fewer staff. Traditionally, the festive season starts after Black Friday and most of the time markets behave rather well and continue the trend seen earlier in November. That is most of the time.

Year-to-date the S&P500 and the Nasdaq have racked up gains of between 24 and 30%. Hence the question, what is there left to hope for regarding the remainder of the year?

According to the financial press, hedge funds, which were lagging long-only fund returns, have been trying to catch up, driving prices recently. Will that continue in December? And what could investors hope for next year? Another 20%+ gain would be very surprising, would it not? However, in the history of the S&P500 (since 1926), there have been three periods when that actually occurred. Two of these happened after a year of market losses. We had a market drawdown back in 2018, so that fits the bill. Back-to-back gains of +10% have been more common in the past. This has happened over 20 times in the past.

What if in the run-up to the presidential elections, President Trump promises another big tax cut? That would boost corporate profits and thus earnings per share again, even if it could mean the final blow for the budget deficit. But those are concerns for later. Right now, the question is what would be the use of staying in the markets and not simply cashing in on the fantastic gains seen already this year? The answer could be that you need to take into account that vast amounts are still swirling around this planet in search of an investment and that market timing theories have proved it does not pay to try to time market entry. Thus stepping out now and coming back in 2020 will prove tricky, even if it looks tempting.

It reflects the anxiety of investors regarding the near term future. It is once again a futile exercise in trying to read the tea leaves. History simply tells us that we need to scale down our ambitions regarding next year’s returns but that gloom is certainly not justified either. The only certainty we might have is that next year, most likely the outcome will be once again linked to politics.