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Is this the end of the bull market or just a correction?

October 30, 2018

 

My answer is that after 25 years in the markets, I can tell you that no one knows. It doesn’t matter whether you are the CIO of Australian Super or Magellan, no one actually knows because the future is uncertain and is dependent on the events that play out from here. All you can do is have a view.

 

My view is that bull markets usually end with a major negative macro-event, they don’t end based on bottom-up company issues. The market usually starts turning down well before any issues show up in company earnings.

 

Looking at the major macro-events that seem to be unnerving the markets they are:

 

1.            The US/China trade war and trade tariffs;

2.            Concern about rising inflation (exacerbated by the oil price and looming Chinese import tariffs); and

3.            Concern about Brexit and Italy’s economy.

 

Of the three, I think the US/China trade war is the number one issue because it has implications for US supply chains and US cost-push inflation and overall trade and stability in the Asian region. Increasing political heat between the two countries is also unnerving financial markets.

 

However, we know that President Trump has a habit of going in hard for better trade terms but then accepting relatively moderate concessions to enable a deal. We have seen this with Canada and Europe but China does not seem to want to ‘play ball’.

 

I think a key event that will determine whether markets can settle down and resume an upward trend will be the G20 meeting in Argentina on November 30. Presidents Trump and Xi are due to meet at this event. The US has already upped the ante by threatening tariffs on all remaining Chinese imports if talks fail, but this story is unsubstantiated, at this stage.

 

If the Chinese offer some trade concessions, there is a good chance that markets can recover strongly but if talks remain at a stalemate, the threat of tariffs on all Chinese import tariffs will feed concern about inflation in the US and stability in the Asian region.

 

On balance, I think this is the key issue that needs to be resolved. Inflation itself is the next highest concern but to date, inflation figures remain contained in the US and indeed Australia (inflation figures will be out here on Wednesday), and a retreat in the oil price would help alleviate these concerns.

 

To be clear, I think the markets can recover if the G20 meeting of leaders makes some progress on trade, particularly between China and the US, however, if the situation continues to get worse then I think it will be hard for markets to 

recover a bull trend. That doesn’t mean that money cannot be made from stocks, the US and Australian markets are already down 11% in October and quality stocks offering value will hold and eventually move higher on bottom-up earnings. However, ‘a rising tide that lifts all boats’ seems unlikely unless the trade situation is resolved soon.

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