Were January Gains Just a Bear Market Rally?

Global Head of Research
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On last week’s “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.


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.


Variant Perception’s Outlook


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 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.


For more investing insights, check out our Economic & Market Outlook


About the Contributor
Global Head of Research
Follow Jeremy Schwartz
Jeremy Schwartz has served as our Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.