Well, Donald Trump is officially imploring Americans to buy the proverbial dip amid the ongoing malaise that finds U.S. equities in a bear market following the worst Christmas Eve trading in history.
“We have companies — the greatest in the world, and they’re doing really well,” Trump told reporters on Tuesday at the White House.
It’s true, we do “have companies”. And it’s also true that, generally speaking, “they’re doing really well.”
But whether now is the time to “bargain” hunt is a debatable proposition to say the least. Sentiment is obviously in the gutter and, from a fundamental perspective, corporate profit growth is guaranteed to decelerate markedly in 2019 as the fiscal impulse fades.
That latter point isn’t debatable. The tax cuts and stimulus bolstered corporate bottom lines in 2018 and as that sugar high wears off, profit growth is expected to decelerate to between 6% and 9%, depending on whose numbers you want to trust. And that’s assuming a benign economic environment. For their part, Goldman forecasts EPS growth of 6% in 2019 and 4% in 2020. Here’s a cautionary tale from Morgan Stanley’s Mike Wilson (and this isn’t his base case, by the way):
The recent strong run of growth we have seen in earnings may have lulled the market into complacency on the forward outlook, but with decelerating topline and building cost pressures, we are highly confident that earnings growth will be below consensus expectations next year and believe there is elevated risk of an outright earnings recession. Topline growth, and margin expansion, have been driving underlying earnings growth, with a boost from lower taxes in 2018.
As alluded to in that passages from Wilson, margins are facing a trio of headwinds: rising labor costs, higher interest rates and higher input costs from the tariffs.
Bottom line (figuratively and literally in this case): There are significant hurdles to corporate profitability in 2019, marking a stark contrast with 2018, a year of record profits and buybacks run wild.
So, when Trump says (as he did on Tuesday), that companies “have record kinds of numbers”, just know that this year was to a certain extent anomalous and while next year may well be decent, that largely depends on whether the self-feeding loop described by Wells Fargo’s Chris Harvey in a December 21 note ends up grabbing hold and not letting go.
Trump – whose market-related tweets over the last six months have touched on everything from the supply/demand backdrop for crude to the effect of Fed balance sheet rundown on liquidity – summed things up as follows on Christmas day:
I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.
Right. Trump is now basically rolling out the same strategy as the Politburo. The White House is suggesting citizens buy stocks to prop up the market. It’s just a matter of time before Trump is on Twitter declaring that Americans have a patriotic duty to buy stocks in order to preserve social stability.
Hilariously, futures dove 1.1% right of the gate on Tuesday evening, hours after Trump’s BTD reco. As of now, they’re rebounding – who knows if that will last. Here’s a fun annotated visual:
We would remind those who might be inclined to take the President’s “buy the dip” advice that 2018 was the first year in 16 that a simple “BTFD” strategy hasn’t worked. Recall this from the same Mike Wilson mentioned above:
[This market] trades like a bear market [as] a buy-the-dip strategy has not worked this year, the first time since 2002. What’s notable about Exhibit 1 is the fact that the only years the Buy the Dip hasn’t worked was during bear markets, or the beginning of one (1982, 1990, 2000, 2002). In the cases of 1982, 1990, and 2002 it was also accompanied by a recession. In the case of 2000, it was the year preceding a bear market and recession and the topping of the TMT bubble. In other words, while 2018 is clearly not a year of recession, the market is speaking loudly that bad news is coming. Our view is that the market is sniffing out an earnings recession and a sharp deceleration in economic growth–something we have written about extensively.
Finally, don’t forget that the deluge of Treasury supply necessitated by Trump’s stimulus is conspiring with Fed balance sheet rundown to suck liquidity away from risk assets. In other words, Trump’s debt-funded tax cuts are part and parcel of why “buy the dip” is now dead. The more U.S. debt the market is forced to absorb, the less liquidity available for other assets. That’s the “crowding out” effect that analysts have been warning about for a year. David Tepper underscored it this week, telling CNBC that “the net biggest issuance of Treasuries is coming next year [so] something is going to get crowded out [whether it’s] bonds stocks etc.”
For what it’s worth, here’s some historical perspective on valuations following the recent de-rating:
So you know, step right on up folks, and try your hand at dip-buying.
We wonder if Trump would make the same call if someone else were in the Oval Office. Our guess is “no.”
Ultimately, the best reason not to take Trump’s advice is of course Trump himself, who will invariably tweet something to capsize equities if and when they finally do manage to rally in the face of a government shutdown that, for now anyway, shows no signs of being resolved.