Earlier this week, with the deadline looming with Mexico of next Monday, the U.S. job growth came out showing that nonfarm payroll increase in May missed expectations by a wide margin [75,000 vs 180,000]. The markets which usually would have taken a leg down on this news rallied hoping for rate cut by the Fed in the June meeting. The rate cut was a valid expectation given the weak jobs data and trade war with China and Mexico.
But then, yesterday, Trump tweeted that Mexico and the United States have agreed on a deal to stop the flow of illegal Central American immigrants from coming into the U.S. Come Monday, the markets were going to expect that rate cut may not happen. Until, Mexico revealed that the agreement on “large” agricultural sales as part of a deal reached on border security and illegal immigration that averted the threat of U.S. tariffs touted by Trump, never occured.
Oh Boy! Here we go again for another week of rollercoaster ride.
Future Wealth’s View
Calling the current market conditions – a “rough” market, is putting it mildly. Hedge funds are losing money and closing shop as they simply are unable to take bets one way or the other. Quant funds are underperforming and seeing massive outflows ‘coz no algorithm can successfully predict the current market environment. Active fund managers are struggling to build an investment thesis to work with, given the rapid changes in policy that is killing any alpha that is generated. Short sellers are getting cleaned out as stock markets whipsawing threatens to put margin calls on short positions.
All of this makes the case for a fundamental defensive approach. Trying to time the market and take long positions or short positions and feeling good about them underperforming or outperforming in the next week or next month, is no reflection of the long term returns that these investments can generate. With the first signs of the impact of the trade war with China soon to be reflected in Q2 2019 corporate results, we remain cautious and would advise investors to remain overweight on defensive names.