Are You Bullish or Bearish on the US Stock Market through 2018?

At the risk of curbing anticipation over what Fed Chairman Jerome Powell might say at next week’s annual symposium in Jackson Hole Wyoming, it is unlikely he’ll say anything that you can use to trade the markets over the balance of this year. Why? It’s not clear that the Fed knows what’s likely to happen nor could it tell us if it did without running the risk of bursting the global financial bubble that it, along with other central banks, has blown since 2008. Secrecy and uncertainty have been instrumental in keeping the market “bears,” most notably the “short sellers” away.

Most informed observers know that the global economy is slowing and that Mr. Powell’s policy to continue raising interest rates, ostensibly because growth is strong and inflation is rearing its ugly head, is making matters worse. Higher rates strengthen the US dollar, which is deflationary to our own economy and exacerbates the woes of most emerging markets. I believe the real reason the Fed is continuing to raise short term rates is because financial institutions, especially insurance companies and pension funds, desperately need higher rates to function properly. Also, raising rates will provide leeway for the Fed to lower them and offer some relief to the markets when (not if) the next financial crisis occurs.

Mr. Powell has the financial markets exactly where he wants them right now, completely uncertain as to what’s actually going on or what action the Fed might take in the weeks ahead. And there are plenty of reasons for the market to sell-off and plenty for it to rally into the New Year.

The bad news is that while many are concerned about inflation, there is still tremendous global deflationary pressure demonstrated by the more than half of commodities, and most notably gold, that are in “bear” markets (i.e., greater than 20% decline), and the fact that almost all have had at least a “correction” (i.e., greater than 10% decline). Many emerging markets have declined and some are on the brink of financial crisis, and with the exception of the US stock market, most global markets are performing poorly. Making matters worse is that the global yield curve (which compares long to short term interest rates) is inverted and copper prices have tanked recently, both signs of bad economic times ahead.

Those poorly performing international markets, and the fear they could worsen, is one good reason the US market might continue to rally, as a steady inflow of offshore capital keeps our markets afloat. Corporations flush with offshore cash liberated by this year’s tax reform could also keep the party going as major corporate buybacks continue this fall. And, if all else fails, history has shown that Q4 is critical to the entire year’s economic welfare, so don’t be surprised if the Fed provides some “unexpected” interest rate relief to goose the markets into year-end, assuming a major crisis doesn’t occur, in which case all bets are off.

Just be aware that even if the US market rallies into year-end, it could severely correct before, perhaps during the next several weeks. So, are you bullish or bearish?