Why a repeat of December sell-off looks unlikely
That’s the view of Greg Taylor, CIO at Purpose Investments, who, while admitting there remains room for tweet-inspired volatility, believes there could be an element of beta chasing as those with cash on the sidelines wait on a pullback that may not happen.
Part of the reason for Taylor’s optimism is the complete 180 degree turn from the Fed, which has turned dovish and market friendly compared to this time last year when it was hiking rates and getting more and more hawkish.
Taylor said: “That’s a really important distinction for the markets and it could keep risk preference higher for the end of the year.
“It also feels like we've seen the worst of the US-China dispute. There’s more potential for people to think that the trade dispute is now more behind us and, if that’s the case, it could really be a bit of a green light for some of the cyclicals and some of the other areas that have really lagged the broader market over the past several years.”
Taylor added that markets do climb a wall of worry and that after a summer when everyone was ready to price in a recession after the classic inversion of the yield curve, now things look better and people are less stressed about global macro fears.
He pointed to the bond market as a good indicator of current sentiment. He explained: “The US 10-year recovered from sub 1.5% to closer to 2% and the yield curve is steep. That could be a good signal for more of the sectors that have lagged to play catch-up.
“That’s more of what I'm looking for – the next leg higher in the market could be led more by the cyclicals and not the narrow leadership of the techs that we’ve had for the last few years.”
While the end of 2019 offers hope, the US election is the wildcard that could provide a lightning rod for volatility. From tweets on trade wars to running election commentary, President Donald Trump is likely to stoke jittery investors.
Taylor said much will depend on how the Democrats put forward as their nominee in terms of policy. “From some indications, there are some policies out there that are very negative for the banks and personal health care stocks. And if that were to be the case, it could be a bit of a risk off some of those sectors.”
Preparing for the choppiness, especially in the US, could mean moving away from crowded, overbought trades and getting ready to be a little more defensive.
Taylor added: “The other thing to look at is that the last few years have really been dominated by the US markets because everyone's been hiding there from a defensive point of view. It’s also been the best performing economy compared to some other areas.
“But if these trade disputes do diminish and global growth picks up, people could get away from being 100% invested in US stocks and looking at other areas, like Europe or Asia - markets that haven't really done as well over the past two years and lagged the US.
“We could see a more of a reversion to the mean for those areas and by that stretch, also sectors that haven't really participated.”