‘Think 2018’: Risk Of Q4 ‘Event’ Elevated Amid Macro Mess
Earlier this year, when the retail "meme" mania was in full swing, I suggested the day-trading Reddit crowd wasn't the only cohort deserving of the "gambler" label.
"Let’s be honest without ourselves," I wrote, in February. "Individual traders, no matter their background and no matter how experienced, are just gamblers. Self-directed investors building a portfolio for themselves and actively hedging that portfolio is one thing. But there’s a fine line between that and a gambling addiction."
I struggled to make the distinction between “investor” and “gambler” for about 2 seconds. Life itself is a constant stream of choices made by weighing risk and probability. Self-identified gamblers are often much more studious in their decision-making. The derisive label is often misplaced.
I see little chance of a technical default, Delta case rates starting to roll over, movement toward a compromise among Dems, deflationary pressure on commodities emanating from China, plenty of cash on the sidelines, and the taper as a non-event (in that it will only be announced in Nov. and won’t begin in earnest till 1Q22). Therefore, I’ll take the other side of Mr. Hartnett’s bet.
I think Harnett is correct that risk is elevated here in 4Q.
However, I think the key question in the short term is whether risk is increasing or decreasing. If increasing, reduce exposure; if decreasing, increase exposure. Its a continuum, not binary.
What are the biggest risks? I think: virus, Fed, debt default, and add China.
Are these risks increasing or decreasing? Virus surge is fading (US and global). Fed next move is well known. Debt default is a low probability event. China is starting to raise “credit impulse” (i.e. CCP is blinking).
Yes there are other risks, but I think they are quite secondary. Suppose infrastructure bills are killed, Biden agenda dies, Democrats dissolve into fratricide, tommorrow? As a human I would be appalled. As an investor, I’d ask: how will that impact corporate earnings over next 1-2 years?
Now, if Harnett is reiterating that expected longer term equity return from this level is weak, I think he is correct.
Is the Fed really going to taper? If they start to taper and stock sell off, then what are they going to do?
I think they should probably taper, regardless of what asset prices do, if there is any substantial inflation. I’m just wondering if they have the resolve or if they will cave in.
My guess is the Fed won’t actually be able to execute their taper. I am/have been expecting the “Q4 event” which will have 2 major results:
First- Dems get it together and deal with all the necessary agenda items: infrastructure 1 & 2, debt ceiling, filibuster, voting rights (THE MOST IMPORTANT!!!). I would not be surprised to see it generate a lot of anger on the part of the Dems and some scorched earth may follow (expanding SCOTUS, Puerto Rico and DC statehood).
Second- The Fed blinks and “delays” the taper in a wink-nod scenario that sees Jerome get another term.
Of course you can’t have a “Q4 event” without some serious Santa Claus rally silliness pushing the S&P to 4800 (possibly 5000) before OpEx in Dec. H is spot on with the OpEx adjective volatility all year especially in month 3 of the quarter which are buyback blackout at its peak.
Of all the risks enumerated accurately in the comments above….the “known UNknown” is how China’s property bubble unwinds. Or can it be inflated further to kick the can down the road at least until the “President for Life” gets confirmed again next year to secure his grip. How exposed is the American financial system to European banks and other entities that are more exposed to China ?? What is the real risk of contagion when the second largest economy in the world succumbs to a liquidity crisis when lenders stop lending and there is no incremental buyer of property at a higher price ??
As a long-term resident of Asia, my sense is that US (and other international) markets consistently misprice risk emanating from this part of the world. So it was last year with the pandemic, when most of us here knew it was a game-changer, but the US and European markets traded for a number of weeks at valuations implying that the virus wouldn’t meaningfully impact them. I see parallels with the current questions around Chinese housing markets. Yes, the Chinese government has advantages that other modern governments do not to contain fallout but that doesn’t (or shouldn’t) imply omnipotence. Once the collective realisation that Chinese property valuations are excessive truly sinks in, what will be the impact on the US, UK etc. I suspect quite a bit more than your average investor realises.