The Zigmont Report (Daily Market Recap for 3/7/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B 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

Sooner than Thursday.  Gary Cohn announced his resignation last night.  US equity futures dropped significantly on the news and overseas markets were off on the news too.  So much for persuading Trump to ease up on the tariffs.  There are a lot of open questions as a result of this development.  The two major ones are:

  • Who replaces Cohn?
  • How’s the initial tariff move by Trump going to play out?

We have to wait and see.  The rumors today swung from there are more tariffs coming after the steel and aluminum ones to there are going to be carve outs for Mexico and Canada and these trade issues won’t be/become a big deal.

It should be obvious to us all that we have no good way to discount the possibilities.  Trump is going to implement the steel and aluminum tariffs tomorrow (details still TBD) and we have to go from there.  We have to watch and see.  We have no idea what China and Europe will do.  We have no idea what Trump will do.

I will say that I think the market is being overly optimistic again.  Big uncertainties just popped up and the dip-buyers are coming in as though the world isn’t changing around them.  I think that’s a very dangerous play.  The fact that the dip-buyers haven’t changed their behavior one iota is a sign that they are going to blindly jump in until it looks like the world is going to end.

The scary part is that a global recession, which could easily be triggered by trade wars, could do just that.

We’re trading at valuations that require 10-plus percent earnings growth and 5-plus revenue growth for many years.  It’s essentially priced-for-perfection territory.

A recession is going to drop equities a lot.  I’m guessing 20-40 percent.  God forbid we get materially higher interest rates too.

I obviously hope we don’t get a recession.  Maybe there’s a very low probability of it happening soon.  I cannot understand how/why the equity market is willfully ignoring the possibility.  There’s a blindness to negatives for a large swath of capital out there.  *Maybe* there was a justification for that last year when everything was coming up roses but everything isn’t coming up roses anymore.

There’s a groupthink, stocks-always-go-up delusion at work and the delusion self-reinforces with each uptick.

Caveat emptor.

See you tomorrow,

P.S. Feb ADP (235k vs 200k est & 244k prior revised from 234k) was a little hot.  Market didn’t care at the time.  Nonfarm payrolls (200k est vs 200k prior) release Friday morning.