A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
The results from Merrill Lynch’s widely followed monthly survey of global portfolio managers was released Tuesday, and it makes for dramatic reading,
“One year ago [Fund Manager Survey] investors bullish, long Bitcoin (it hit $19,611 on Dec 19th 2017), global stocks, banks, and short bonds and defensives … one year later FMS investors bearish, long cash, US dollar, defensives, short global stocks, tech, industrials … Dec’18 FMS “bearish”… global GDP/EPS expectations down big, stocks allocations at two-year lows … but cash level at 4.8% not enough to trigger contrarian “buy signal” for risk assets from BofAML Bull & Bear Indicator.”
Money managers are very bearish, but not pessimistic enough to trigger a contrarian buy signal predicting a market bounceback,
“@SBarlow_ROB ML: Once we were bulls” – (research excerpt) Twitter
“Investors surveyed by the BofAML fund manager survey just made their biggest ever shift to bonds” – Bloomberg
“@SBarlow_ROB ML: "Sell HY bonds when the model implies a >2.5sd increase in spreads; buy HY bonds otherwise ... Current reading: Short HY" – (research excerpt) Twitter
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Morgan Stanley strategists Michael Wilson (U.S.) and Andrew Sheets (global) were the most accurate market forecasters in 2018, in my opinion.
In January, the consensus view was for cyclical stock outperformance amid a “synchronized global economic recovery,” but Morgan Stanley predicted a “rolling series of bear markets” that moved from volatility to technology to bonds.
Mr. Wilson reiterated his 2019 market outlook in a Monday report. The good news is that he sees a good entry point for investors in 2019. The bad news is that he sees a lot of market pain first,
“As we head into 2019, we are watching earnings, trade, China growth, the Fed, and [Purchasing Managers Indices] particularly closely… Since October, defensives such as Health Care, REITs, Staples, and Utilities have seen a tremendous run of outperformance and now look a bit extended tactically. This relative performance is sending a clear signal that ISM PMIs face material downside and our Morgan Stanley Business Conditions Index corroborates this, having plummeted in December by 21 points to its lowest level since February 2016. After PMIs roll, we think there could be a bit of a reversion from defensive outperformance.”
In short, Morgan Stanley sees a rally for risk assets, but only after the U.S. economic data rolls over. Mr. Wilson also sees a 50 per cent chance of a U.S. earnings recession, two consecutive quarters of negative year over year profit results.
“@SBarlow_ROB MS: "The degree of defensive outperformance has us thinking a tactical cyclical bounce may be closer than anyone thinks, but timing is tough"” – (research excerpt) Twitter
“@SBarlow_ROB MS' Wilson goes full Grinch, "We continue to think there is a 50 percent or greater chance of an earnings recession next year ... should coincide with PMIs near or below 50 and a collapse in consumer sentiment" – (research excerpt) Twitter
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Crude prices are getting drilled at time of writing – West Texas Intermediate oil is down 2.4 per cent after being down as much as four per cent overnight,
“U.S. crude oil dropped $2.04, or 4.1 percent, to a low of $47.84, its weakest since September 2017, before recovering to around $48.55 by 1140 GMT… “A large part of the move is due to a broader market sell-off, with both U.S. and Asian equity markets coming under pressure,” said commodities strategist Warren Patterson at Dutch bank ING in Amsterdam. “Specifically for the oil market, there are no clear signs yet of the market tightening,” he added.”
“Oil drops 4 percent on oversupply, equities sell-off” – Reuters
“Oil prices drop to the lowest since September 2017. OPEC+ output cuts apparently can't offset increased U.S. production” – Bloomberg
“ Oil prices drop 4% on supply and growth concerns” – Financial Times (paywall)
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Tweet of the Day (part of an amazing thread of tweets):
Diversion: “Why China’s electric-car industry is leaving Detroit, Japan, and Germany in the dust” – M.I.T. Technology Review
Scott Barlow