With the SPX up ~8% in just the last month, increasingly nervous investors who still vividly recall the freefall days of December 2018, are wondering what will stop the unrelenting rally according to JPMorgan's Adam Crisafulli who writes this morning that while there are always risks, none of the (known) ones seem particularly threatening at the moment.
Still, according to the JPM strategist, investors should be wary about chasing the SPX above 16x (i.e. above ~2750) but the index is more likely to touch 16.5x (>2800) than it is to hit 15x (<2600) based on everything known right now.
With that modestly bullish bias in mind, Crisafulli lists 14 things that can go wrong and send stocks sliding once more.
- TSYs and the USD fail to ratify the Fed optimism – at some point the TSY curve needs to steepen and the USD has to weaken in order to confirm the dovish takeaways from the recent Fed decision. If TSY yields fall across the board (or even worse, if the curve flattens) and/or the USD stays bid, this would suggest growth is set to soften going forward.
- Growth softens – US growth loses steam, European decelerates further, and China fails to stabilize. At the moment, this seems unlikely – the US is on a healthy track and China data of late has contained some silver linings (Europe is a bigger wildcard).
- The US and China fail to reach a trade agreement – while its always possible Trump could move forward and hike tariffs after the 3/1 ceasefire deadline, this seems very unlikely and all signs point to a Washington-Beijing détente. The question at this point should be what happens to the existing tariffs – are they rescinded instantly or kept in place to ensure Chinese compliance?
- Trump ratchets up pressure on Eurozone auto OEMs – the Commerce Department is likely to soon grant Trump the authority to implement auto tariffs on national security grounds although it seems unlikely the White House will actually take this step. The CQ4 market volatility has led to a clear reduction in White House trade threats and it seems unlikely this is an agenda Trump wants to pursue aggressively heading into ’20.
- Earnings estimates continue to drift lower – the ’19 consensus has drifted down from ~$178 back in Oct/Nov to ~$172-173 at present. A ~$172.50 number is enough to support the SPX at present levels but should it slip any further obviously this would represent headwinds for the SPX. Given that CQ4 earnings are largely over, the ’19 consensus probably won’t change much for the next few weeks.
- Super-cap tech stocks exhibit ongoing fatigue – it wouldn’t be shocking to see the super-cap tech stocks continue to trade sideways as they digest years of outperformance and this would be a headwind for the SPX given their enormous weighting in the index (although this could help fuel further outperformance for cyclicals and EMs as the tech dollars search for a new home)
- Investors could become more sensitive to valuations – investors may not be comfortable chasing the SPX above 16x but that still means the index can get to ~2750 (and 16.5x would get the index above 2800). Based on the present fundamental landscape, the odds of the SPX touching 16.5x are higher than they are for the index to return back to 15x.
- Washington engages in a big debt ceiling battle – given the recent wall funding fracas, some may worry about a protracted battle around the debt ceiling but this probably won’t occur. Neither side has made serious debt ceiling threats while the White House clearly is attempting to moderate its policies and rhetoric in a bid to quell market volatility. The debt ceiling has been suspended until 3/2 although it probably won’t become binding until the summer.
- The Mueller report legally jeopardizes Trump – media reports suggest the Mueller report could hit as soon as mid-Feb although it seems this may wind up be anticlimactic and probably won’t legally undermine Trump.
- The Fed attempts to recalibrate market expectations around tightening – stocks right now assume the Fed is permanently over with tightening and could conclude its balance sheet run-off process sooner than anticipated just a few months ago. However, if US data stays on its present track, int’l growth improves, and stocks extend their gains, the odds of one final hike could rise (although this probably won’t be a problem for stocks for a couple more months at least).
- Brexit is “hard” and disorderly – the odds of this actually happen are low (the 3/29 exit date is very likely to be pushed back as neither the UK nor the EU want a “hard” exit) and regardless the SPX should be relatively insulated from any fallout.
- Crude supplies spike and oil prices collapse – stocks are very positively correlated to oil and thus a softening in Brent prices would undermine the SPX. This may be a risk going forward to the extent the OPEC+ supply agreement crumbles and/or a change in leadership in Venezuela leads to a spike in output from that country but for the next few months oil is likely to stay on its present track (in fact, the near-term risks are skewed to the upside given further tensions in Venezuela and the upcoming expiration of Iranian sanction waivers). The next OPEC meeting is Apr 17-18 and US Iranian sanctions waivers will expire at the end of Apr (it isn’t clear which waivers will be extended).
- Investors grow more nervous about tax rates ahead of the 2020 US election – this is something stocks should worry about given surging deficits and increased political support for higher tax rates on top earners but for the next few years investors probably won’t worry.
- Draghi is replaced by someone very hawkish (or someone who unnerves markets in some other fashion) – Draghi’s term concludes at the end of Oct but it seems very unlikely the ECB shocks markets with his replacement. The more important question right now isn’t who will replace Draghi but instead if the ECB will hike rates this year at all (or will they ever hike rates).