Macro trends can run for a while, but they can also experience a quick end. Elections (Brexit, US Presidential Election) can cause the most powerful reversals in markets. Following the November 2016 election, US stocks went on a 15-month 60% rally. The Euro Bear Market started with Brexit in June 2016, which has been dragging on for the last three years. When US interest rates broke 2.5%-3.0% in January 2018, the S&P 500 entered into a wide trading range lasting about 15-Months. Here’s my guess how things play out going forward.
We may be at another one of those intersections. Trump rocked the market last Sunday with his Chinese Threats, and it took a few days before Wall Street got its bullish calls together. By mid-morning Thursday, the President said everything was fine, and stocks recovered. He got a letter from Chairman Xi. It says, your Flush no good. I have full house. They will make the deal. Mr. Market convinced the President that Recession was around the corner if he continued waging trade wars. That could be enough to re-assure markets, as it did Thursday. He must pull a rabbit out of his hat Friday. The Chinese are mad.
Currency and interest rate markets heard a different message, however, putting an end to the Powell put. Markets tricked him into a dovish stance last December. Last week, he said inflation in the US is going higher and rates ain’t going no lower. A cut was needed just to sustain the bond rally. Not happening. The $ has been shaky ever since the Q1 GDP report on April 26, and the Euro is showing signs of strength. If the Brits have a second vote and drop all plans for Brexit, the Euro could be headed higher.
That’s bad news for the Utilities, surprisingly one of the best performing sectors in 2019. Few expected them to rally last year, because interest rates were so already low, and looked to be headed higher last Spring. But it still made sense to Euro and Asian Money Managers to park their excess reserves in $US and stock market via T-Bonds, ETF’s like TLT, and Utilities. As long as the $ was strong and US rates were rising. They might lose some, but it was a better than German Bunds or Japanese Debt, both of which guarantee a negative rate of return. So, Utilities it was until…