The Zigmont Report (Daily Market Recap for 1/3/19)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

The market has changed.  Last night Apple guided it’s revenue numbers down significantly.  It pointed to China economic softness as a culprit.  There are other contributing factors naturally but China is a buzzword right now and with soft Chinese data from a couple days ago still hanging in the air, the market is now changing its view on a good many things.  And to throw more fuel on the fire, US ISM data came in soft for December.  The S&P was already down 40 points when that news hit and things obviously worsened.

Interestingly, bulls pushed the market up from the lows that morning and the S&P was only down about 20 points just before lunch.  Stocks fell consistently from then on and we closed down a significant amount.

So here’s what’s changed today:

  • A global slowdown is now the consensus expectation
  • A recession this year is a plausible fear
  • The market is pricing in zero Fed hikes for the rest of the year
  • The market is pricing in a partial Fed reduction in rates this year

Those are meaningful changes to the investment landscape.  Equities took it on the chin today and bonds rallied across the curve.  The market will *not* pay above average multiples for earnings that are looking flat-to-down over the next year.

The good news, is the market is *adjusting* to these changes in a pretty calm and controlled process.  We are dropping, yes, but we are feeling our way lower instead of dropping off a cliff in an explosion of panic.

For all the talk of the robots and the evils of computer-centric equity markets, I see a pretty orderly clearing mechanism at work.

So here we are, in a different world.  Yesterday, a lot of the above items were *speculations.*  Today they are realities.  What are we going to do at this point?

I think, in the short term, the market is going to be looking towards the Fed for bullish help, both indirectly and directly.  The nonfarm payrolls data tomorrow (+184k est vs +155k prior) will be received and interpreted as to how much room it allows for the Fed to pause hiking *and maybe even begin lowering.*

Additionally, the statements & quotes from Fed officials will be closely parsed for hints of the Fed catching up with the market.  The market is worrying about a recession and if the Fed doesn’t share that concern shortly, the market is going to lament a behind-the-curve Fed.  Bears will eat in that event.

However, if the Fed signals that it is coming around to the market’s view….expect a bullish response from investors.

Anyway, something to keep in mind is that lots of estimates and narratives are now in flux.  The volatility is going to be great for however long this process continues.  Additionally, the bulls are going to have tough sledding ahead until they get an assist from the FOMC.

See you tomorrow.