Inhale, exhale, pause

In a bear market, don’t do anything on a Monday that you wouldn’t have done on the Friday, says Louis Gave of Gavekal Research:

As bad news piles up, investors brood, sleep poorly, snap at their spouses or children, and go in first thing Monday morning and start to liquidate positions. Undeniably the picture for the now rather stretched equity bull market has been deteriorating for a while, with spiking bond yields, creeping inflation, higher oil prices, and a collapsing US dollar.

He sees US politics as a possible trigger, similar to Paul Krugman, although that does kind of invite the question of which newspapers people in the market have been reading for the past year:

Perhaps news that the US administration and its bureaucracy are now locked in a “take no prisoners” battle was the proverbial straw that broke the camel’s (or rather the bull’s) back?

Quantitative strategists at JP Morgan are more even handed. It could be bad, but not yet (wait till May?), as there isn’t a particular bond yield trigger, and tax reform isn’t all priced into stocks yet:

We attribute the bulk of the recent market appreciation to the uptick in global growth, and weaker USD. Talking to our clients, we still find risk aversion and hesitance about the impact of fiscal reforms and political developments (e.g., mid-term elections, Nunes memo, etc.). The fact that small caps, tax beneficiaries, value and domestic stocks are lagging since the bill (e.g., vs. international, growth, large-cap tech) is evidence that fiscal reforms are not fully priced in.
In terms of timing market downside risk, we would be more concerned about the period after the Q1 earnings season (e.g., in ‘sell in May’), when fiscal reforms are likely to be priced in and central banks make further progress on the normalization of monetary policy.

Some are more bullish. Scott Minnerd, Global CIO at Guggenheim, has the “time for courage” take.

We brave few, standing at the precipice…

Or, as he puts it, higher interest rates are the cause, but we should hit bottom soon:

The backup in bond yields has been significant, with the 10-year Treasury rising 23 basis points in the last month, and hitting a recent peak of 2.88 percent. The tax cut euphoria drove stocks up at an unsustainable pace, but concerns have been building about bond market supply congestion following the Treasury Department’s refunding announcement, and Friday’s employment report has increased speculation that the Fed may need to become more aggressive to head off potential inflationary concerns.
Contributing to inflation worries is impressive wage growth. Hourly earnings were up 0.3 percent in January and upwardly revised for December to 0.4 percent, supporting the concept of wage growth of 4 percent or more for 2018. These data are trending up even before we fully digest changes to the minimum wage and the effect of wage increases and bonuses related to the new tax plan. These are likely to give a lift to consumption, which will reinforce more labor demand, and thus drive unemployment lower.

Growth, the business cycle and valuations are all supportive of equities, says Scott reassuringly.

The folks over at 361 Capital, meanwhile, are calling this a “healthy wipeout”:

The best news right now is that credit spreads are tight and lending problems are minimal. Companies can easily find debt and equity capital to expand if they want to. Current equity and risk asset prices are getting a good dunking right now, but they will bob back to the surface and get on their boards again. The next question will be how long will stocks have to paddle before they find another good set of waves to ride. Hopefully not too long.

Hope, after all, springs eternal.