David Rosenberg, the chief economist at Gluskin Sheff + Associates Inc., said in a recent note that the writing is on the wall for the stock market rally, as the next move could be lower, reported The Globe and Mail.
"Enjoy it while it lasts, but think of how artificial it all really is and how to prepare yourself, at these lofty price levels, for the reversal that is as inevitable as night following day and vice versa," Rosenberg said.
"The stock market surely remains on wheels and is being driven by concentrated gains in certain large-cap names and a major shift in economic sentiment, with views that a 'phase one' trade agreement is coming our way soon," he said.
President Trump has spent the last several months pumping an illusionary trade deal, something we outlined last week, all in the effort to boost the stock market while the Federal Reserve launched 'Not QE.' So when Rosenberg calls the rally in stocks "artificial," he means that.
And in the last 48 hours, trade optimism has turned to trade pessimism, and it's becoming increasingly clear that China is preparing for the worst-case scenario of a prolonged trade war.
On Monday morning, CNBC's Eunice Yoon tweeted, "Mood in Beijing about #trade deal is pessimistic, government source tells me. #China troubled after Trump said no tariff rollback. (China thought both had agreed in principle.) Strategy now to talk but wait due to impeachment, US election. Also prioritize China economic support."
Then on Tuesday morning, Global Times Editor In Chief tweeted, "If President Trump believes China's economy is crumbling and Beijing will eventually make decisive concessions, he has to wait until Ivanka becomes the president to sign trade deal with China."
Then by Tuesday afternoon, President Trump said he could boost tariffs even higher if there's no trade deal, which has sent global equities into the red for the second consecutive session.
Rosenberg, who is leaving Gluskin Sheff to start his own research firm, called Rosenberg Research and Associates Inc., said investors have been "drinking vast amounts of Kool-Aid" via trade headlines while overlooking the slide in hard economic data.
"In barely more than a month, we have seen portfolio managers move from their highest cash levels and recession concerns in a decade to downright exuberance. The just-released [Bank of America Merrill Lynch] survey of institutional investors showed the biggest improvement in economic growth expectations in the year ahead since the poll began in 1994."
And maybe Rosenberg is onto something here as stock market fundamentals slide and the alligator jaws open up. A no trade deal scenario playing out in the near term could be the catalyst to shock investors back to the deteriorating macro landscape.