Why Do We Think the Consensus is Wrong
November 19, 2019
Shashi Mehrotra is Senior Vice President and Chief Investment Strategist and an early adopter in the application of artificial intelligence to the field of investment management.
He is the chief designer of Asset Allocation Neural Network (AANN). AANN is a sophisticated computer model that uses mathematical algorithms to forecast the relative strengths of different asset classes. Mr. Mehrotra spent over a decade on the research, development, testing and implementation of AANN's state-of-the-art artificial intelligence system.
Mid Quarter Commentary 11-2019
The recent announcement from China on their successful incarceration of fentanyl smugglers seems to indicate the Chinese have reversed their ‘outlast Trump’ strategy. Previously China was criticized for their inaction on preventing the drug from being exported into the U.S. and President Trump has made this a key issue in trade talks. Now China is working hand in hand with the U.S. to stop the drug trafficking. China also announced an agreement with the U.S. to roll back additional tariffs as part of a Phase 1 deal. Christmas arrived early for Mr. Trump because this is a huge political gift from China to President Trump. China must believe a grateful Trump will be better than the anti-China wild-card1 Elizabeth Warren and certainly better than an angry re-elected Trump. The market responded positively to this news as the Chinese Yuan is now trading above the psychologically important level of 7 for the first time since August. In August, the Yuan had ruptured the critical level of 7 after losing 4% in just a month following the U.S. announcement of tariffs. We have been anticipating that the U.S. will eventually gain an upper hand in this trade war against China and it may now be taking place.
Fundamentally speaking, we have long maintained that those with an overly bearish market outlook are misguided. In particular, their expectations of an impending economic recession, a widespread earnings breakdown, and/or a Federal Reserve halting progress by raising short-term interest rates are all unjustifiable. Recent events have all pointed towards a continuation of steady but slow growth. Both manufacturing and non-manufacturing employment indices have risen and October’s payroll increase of 128,000 was well above consensus forecasts. Almost 400 of the 500 companies in the S&P 500 Index have reported their earnings and more than 75% of them have beat consensus estimates. Finally, despite widespread expectations of the Fed hiking rates or not cutting enough, we have maintained that they will continue to be dovish in the current environment. They have already cut the interest rate three times so far.
As far as technical market indicators go, the new highs in S&P 500 and the DJIA were not accompanied by a new high in the RUSSELL 2000 Index, which represents smaller capitalization stocks. We remain concerned about this bearish anomaly but recent price action shows that the RUSSELL 2000 index is also getting close to breaking above the top range of its trading band. This is favorable price action.
With equity indices close to record highs, it is prudent to watch for signs of froth and extreme optimism. Although, we would not be surprised to see the S&P 500 flirt with 3,700 in the next 12-months. We will continue to keep a close eye on our financial models and different economic variables for signs of a reversal.
Shashi Mehrotra, Chartered Financial Analyst, Senior Vice President and Chief Investment Strategist. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Lincoln Investment or any of its affiliates. Such opinions and predictions are as of November 12, 2019, and are subject to change at any time based on market and other conditions. This material includes forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied. No predictions or forecasts can be guaranteed.
Current market and economic data is as-of November 12, 2019. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
Investing involves risk including the potential loss of principal. The opinions and material presented are provided for informational purposes only. No person or system can predict the market.
Past performance is no guarantee of future results.
The S&P 500 Index is a capitalization weighted index of 500 of the largest exchange-traded stocks in the U.S. from a broad range of Industries whose collective performance mirrors the overall stock market. Capitalization weighting results in the larger components (stocks) carrying a larger percentage weighting. The Equal Weighted S&P 500 consists of the same stocks but equally weighted and consequently may provide insight into the breadth/disparity of market performance. Investors cannot invest directly in an index.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index.
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