Equity markets sold off over the past two days.
While the cumulative decline is a mere 1.2%, the sharpness of the reversal is
notable and the abrupt change in character from much of November stand
out. Moreover, the selling intensified Monday with the downside reading
of US ISM Manufacturing (48.1 vs 49.2 expected).
In our view, we would be buyers of this pullback. Our base case remains
that 2020 economy > 2019 economy, setting the stage for a “revival of animal
spirits” (investor perception) and thus, setting the stage for a move towards
3,185 before year-end.
POINT: MARKIT PMI SHOWS
IMPROVEMENT, EVEN AS ISM MISSESThe November Markit US PMI (reported 12/2) showed an improvement to 52.6
from 51.3 and the best readings since April 2019. This is in contrast to
the US ISM showing flat 48.1 vs 48.3. The differences between ISM and
Markit reflect some difference in methodology (Markit weighs forward looking
indicators, while ISM is a simple avg of 5 components) and Markit believes ISM
tends to weight larger companies (https://ihsmarkit.com/research-analysis/explaining-us-manufacturing-pmi-survey-divergences-Oct19.html).
Thus, we believe the
Markit divergence (improvement) vs ISM weakness mitigates the “miss” value of
the ISM reading.
POINT: GLOBAL PMI
BROADLY IMPROVING. Global PMIs are broadly improving in November. The JPMorgan Markit
Global PMI rose to 50.3 vs 49.8 (oct) and moving above 50 for the first time in
7 months. This further supports the notion that 2020 economy > 2019
economy and should revive animal spirits. Only Germany remains
languishing, but not surprising given the linkage to China.
POINT: SEEMS VERY
OVERSOLD
Another way to think about risk/reward is to
look at the RSI (relative strength index) and on the 4-hour chart, we can see
that the RSI is severely oversold. For most of 2019, when fundamentals
are improving, these oversold readings of RSI are bullish.
POINT: CENTRAL BANK EASING + EASING
FINANCIAL CONDITIONS = GDP UPSIDE
Finally, we
continue to point to the building tailwinds from both central bank easing (2020
easing vs 2019 mixed) and the easing of financial conditions. As we noted
in several prior notes, the easing of financial conditions is estimated to add
0.5% to GDP growth/quarter in 2020 (per Goldman Sachs economist) and is adding
to the upside to both GDP and S&P 500 EPS growth.
BOTTOM LINE: WE ARE
BUYING THIS PULLBACK, LOOKING FOR >3,185 BEFORE YEAR-ENDBottom line, we believe there are more funds that “need performance” than
those “playing with house money” and as a consequence, we expect this pullback
to be bought. And we do not think this is a repeat of December 2018.
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