Market Cheat Sheet Dec. 26, 2018

Market Cheat Sheet

Wishing you and your family a very happy holiday season! 

“Going back to the 1980s, the S&P 500 has typically rebounded after posting a weekly loss, such as the punishing setback it suffered last week. This year, that “buy-the-dip” trend has broken apart. The broad index has fallen an average of 0.04 percentage point on the day following weekly declines, marking the first time since 2002 that stocks have consistently slipped after one-week pullbacks, according to Morgan Stanley. What is troubling is that the only years in which stocks haven’t reliably rebounded following dips have been either at the start of or in the middle of a bear market, Morgan Stanley says. In some years, including 1982, 1990 and 2002, investors were hit by not just a bear market but also a recession.” – WSJ

“The Business Roundtable’s CEO economic outlook index… dropped 4.9 points to 109.3 in the final quarter of the year. That still ranked as one of the strongest readings in the survey’s 16-year history but marked a third consecutive quarter of ebbing optimism… The Business Roundtable’s members are projecting 2.7 per cent growth in US GDP for 2019 and Mr. Bolten singled out the role the Trump administration’s deregulatory agenda has had on keeping business confidence close to record levels.” – FT

“Being late cycle may invoke troubling memories of 2008; however, fundamentals suggest that today’s financial environment is quite different. This late-cycle period could be long, sticky and drawn out, just like the broader cycle; calling the end would be a fool’s errand, and could result in missed opportunities; some good rules to follow include: using a “dimmers” approach to asset allocation; employing strategies to participate in the upside, while trying to mitigate downside risk through hedging; avoiding big directional calls, concentrated positions or risky bets; retaining good quality fixed income, even if recent performance is disappointing; have a bias to quality across asset classes; prioritize volatility dampening; and take capital gains where it makes sense; most importantly, rebalance, stick to a plan and remember: get invested and stay invested” – JP Morgan 2019 Investment Outlook: Late-Cycle Risks & Opportunities

Taking Investment Teams from Good to Great [CFA Institute]

“An industrywide scramble is under way this week to hire young investment bankers… Welcome to private equity’s annual recruitment, the frenzied window of interviews and fast-expiring job offers that firms use to fill their junior ranks. The candidates graduated college as recently as last spring and landed at Wall Street investment-banking desks just weeks ago. Those lucky enough to get offers will finish their two-year bank analyst programs and start at private-equity firms in the summer of 2020, with salaries that can exceed $300,000. (Junior bankers in analyst programs typically make in the low six figures, including bonuses.)” – WSJ

“But we should also note that capitalism is far from perfect. While it’s superior to any other system yet devised, it’s subject to sometimes intense cyclicality that can result in turmoil and hardship for many. And we interfere with that cyclicality at our peril, as pent up economic forces will eventually be unleashed with far greater ferocity. Still, under capitalism, markets and economic activity can easily overshoot, in both directions. Fads can be mistaken for trends; the flavor du jour can masquerade as a time-tested recipe. An ephemeral stock price can be made to seem a permanent achievement, an unwavering final verdict. The temporary opinion rendered by the market can be easily confused with actual business success. And those mercurial capital flows, as welcome as they are when they’re inbound, can wreak havoc when they reverse, or as they attract undisciplined competitors and drive excess supply at the worst possible moments. Moreover, the aforementioned creative destruction may in aggregate leave society considerably better off, even as it creates both winners and losers, and the losers often suffer through no fault of their own. A capitalist economy should be judged not just on the aggregate economic improvement driven by its innovation but also on the design and strength of the social safety net that cushions the ill, or disadvantaged, or those who simply fail to thrive in their particular setting, geography, industry, or trade. After all, creative destruction is still destruction, even if inevitable and in the service of a net gain to society.” – HBS

“According to the IEA, major new non-OPEC projects will only add 1.0 mmb/d per year between now and 2022 – a 40% slowdown compared with the last two years and 30% below the last 10 year’s average. Assuming major projects account for 80% of all new field development, we expect total new conventional non-OPEC production to add 1.2 mmb/d per year. Assuming a 4% decline rate implies that conventional non-OPEC crude production will decline by nearly 500,000 b/d each year between now and 2022; US shales simply cannot meet the combination of anticipated global demand growth and a decline in non-OPEC production outside the US; Making matters worse, several years of reduced maintenance capital spending is taking a toll on existing conventional non-OPEC fields. North Sea production has been down 150,000 b/d on average y-o-y for the last three quarters. We expect these problems will persist and the IEA has now revised North Sea production lower for the remainder of 2018; Despite this year’s disappointment, IEA is once again hoping that 2019 will see robust conventional non-OPEC crude growth outside the US in excess of 500,000b/d – something our models suggest will again be impossible to achieve” – Conventional Non-OPEC Oil: Declines Are Set To Rapidly Accelerate

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