Are we in a bear market rally or a new bull market?
The S&P 500 has now rallied close to 19% from its Boxing Day lows on Dec. 26, so we are on the cusp of a “new bull market” at least in a headline-oriented technical sense. Will it last, or are we destined for a double top? Next month is likely going to be a pivotal point in helping to determine the answer to that question.
Three big news events are set to break next month that markets the world over have been anticipating for years already. The first is the March 1 trade deal deadline that President Donald Trump has set with China. The second is the March 29 Brexit deadline. The third materialized just yesterday, with the Federal Open Market Committee releasing its Jan. 30 meeting minutes. In those minutes, “almost all” FOMC members agreed that an announcement to end balance sheet normalization should be made “before too long.”
From the release:
"Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet."
Granted, the phrase “before too long” is subject to interpretation, but according to Bloomberg, citing Diane Swonk, chief economist at Grant Thornton LLP, the announcement will be made next month, presumably in the next FOMC meeting statement on March 20.
This is the frifecta of news that markets have been anticipating, indeed for years. But outcomes of all three are heavily skewed. In the case of the March 1 deadline for a U.S.-China trade deal, more indications have occurred of late that Trump is considering an extension. There is little chance that Trump would speak this way publicly if he didn’t intend to actually grant the extension. Further, if he indeed does grant it, there is even less chance that he will ultimately raise tariffs. Considering how the Trump administration has tied its fate to Wall Street’s performance, granting an extension and signaling that a deal is possible, only to then pull the rug out from under the markets by dramatically raising tariffs, would be shooting themselves in the foot, or worse.
The markets’ response to Trump’s extension of the trade deal deadline then is the first piece of the puzzle. The second piece is Wall Street's response to the assumed end of the Fed’s balance sheet reduction program on March 20, which should be bullish news for equities as it would constitute the end of quantitative tightening. The third and final piece would be the granting of an extension of the Brexit deadline on March 29. If it is granted, markets will probably trade with the working assumption that Brexit will be pushed off indefinitely.
All of these events will serve to remove nagging layers of uncertainty from equities markets across the world, not least of which in the U.S. If stocks can break through to new highs in response to these events, then chances are the latest bear market is in fact over, not just in the obvious technical sense but probably for some time yet. If, however, investors buy the rumor and sell the fact here, then in retrospect, we are currently in a bear market rally and could fall to new lows below 2,350 on the S&P 500 before long.
Disclosure: No positions.
