Why do we think the consensus is wrong?
February 08, 2019
Shashi Mehrotra is the Chief Operating Officer and Chief Investment Officer of Legend Advisory and a pioneer in the application of artificial intelligence to the field of investment management.
He is the chief designer of Legend's 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.
February 2019 Market Commentary
WHY DO WE THINK THE CONSENSUS IS WRONG?
I enjoy reading financial outlooks and perspectives from a wide variety of industry experts and colleagues. At the end of the year, it was striking for me to see how many were in agreement on their predictions for how they believe 2019 will unfold. Article after article covered how they felt the global economy is slowing, earnings are slowing and certain events will be responsible for taking the markets down. None of them are expecting a new high this year, which is intriguing because when everybody expects one thing in the markets, the markets have a knack for proving the majority wrong. Our contrarian view is we believe we’re going to see a new high this year in the equity markets.
We do still have to navigate through some potential landmines in the market landscape that have caused this overall bearish outlook to spread. The Mueller investigation, the trade deal with China, and the Brexit negotiations all have the potential to negatively impact the markets.
If the Mueller investigation leads to an impeachment process, that certainly would not be productive for the stock market, regardless of what political party you align with. No one can predict how this will end up. Brexit is another gray area that could affect the markets. If there’s a hard exit on Britain leaving the EU, it could be troublesome for the markets.
The uncertainty surrounding the trade deal with China is probably the biggest impediment to the markets going up right now. However, we feel very confident that it’s going to end up positively. China recently declared that their economy is the slowest it’s been in decades which will motivate them to enter into a deal. I believe President Trump and General Secretary Xi are going to come out with an agreement that will help them both save face and appear victorious. That’s similar to what happened with Canada. There was a lot of commotion leading up to an agreement, but Justin Trudeau signed the deal that President Trump proposed. South Korea, Mexico, and Europe did it as well. I don’t doubt that China is going to sign a similar deal. We haven’t had zero tariffs with China for as long as I can remember. It will be a historical accomplishment.
We do believe earnings and the economy are going to slow, but not to the point where it’s recessionary or negative. We still expect earnings to keep growing, but at a slower pace. We still think the U.S. economy will see a real GDP growth rate of 2.25% for 2019. For the globe, we expect 3.5% GDP growth, which is still healthy even though it is less than the year before. It’s still very amenable to solid gains for stocks. Particularly because the stocks have so many dark clouds hanging over them, and we think the consensus has been overly pessimistic about the market landscape. We just don’t believe all of these conditions will play out in a negative way. We feel that the trade deal in particular will resolve in the first half of this year, which alone could push the markets up 20%. We’re standing by our outlook that the S&P 500 could surpass 3,000 this year which would be a 25% return from the lows that we saw last year.
Shashi Mehrotra, Chartered Financial Analyst, is the Chief Operating Officer and Chief Investment Officer of Legend Advisory. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Legend Advisory or any of its affiliates. Such opinions and predictions are as of February 5, 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 February 5, 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. Neither asset allocation nor diversification guarantee a profit or protect against or eliminate the risk of experiencing investment losses. All investments are subject to risk, including the risk of principal loss. There is no assurance that the investment goals and process described herein will consistently lead to successful investing.
The information shown does constitute investment advice, does not consider the investment objectives, risk tolerance or financial circumstances of any specific investor. The information provided is not intended to be a complete analysis of every material fact respecting any portfolio, security, or strategy and has been presented for educational purposes only. Data obtained from the sources cited is believed to be reliable and accurate at the time of compilation.
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.
There are some risks associated with investing in the stock markets: 1) Systematic risk - also known as market risk, this is the potential for the entire market to decline; 2) Unsystematic risk - the risk that any one stock may go down in value, independent of the stock market as a whole. This also incorporates business risk and event risk; and 3) Opportunity risk and liquidity risk.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
Securities offered through Lincoln Investment, Broker/Dealer, Member FINRA/SIPC. www.lincolninvestment.com. Advisory services offered through Legend Advisory, Registered Investment Adviser. The Legend Advisory portfolios described are offered as part of a discretionary advisory service. Legend Advisory will assess an annual investment advisory fee based on the value of assets in your Legend Advisory account(s). Additional information regarding Legend Advisory’s investment advisory fees can be found in the firm’s Form ADV 2A Appendix I, which is available upon request.