Uncertainty dominates

During the final quarter of last year some negativity appeared in global markets.

There were musings about emerging markets being out of favour due to a larger set of issues in the developed world. These larger issues included the ongoing trade war between the US and China, the ever looming uncertainty of Brexit, rising debt levels and tightening monetary policy in the US and Europe, as well as "flight to safety" and investment flows away from emerging markets.

These factors were combined with a host of local economic issues that at the time included the waning of Ramaphoria — the positive effect that President Cyril Ramaphosa’s rise to leadership of the ANC and SA had on local markets — ever increasing unemployment, lower consumer spending and confidence, a brief technical recession and the variety of issues caused by rampant corruption.

These all culminated at the end of 2018, and markets around the world recorded the worst December in many years. Market commentators and analysts who had given bearish warnings in the previous months felt justified.

Then January happened — the strongest start to a year in many years.

So far, this year, markets have rallied really hard (almost as hard as they previously fell). This time around it is the turn of the bullish commentators and analysts to pull faces at the bears. The world, it seems, has forgotten about all the reasons that the market was filled with fear just two months ago.

So, what happened to all the fear and negativity? Have the issues that plagued sentiment during that period somehow miraculously been resolved?

In truth, no, they haven’t been resolved; they have just been forgotten. The market has a short memory and is driven by sentiment.

Let’s look at some of the things that have changed, and hopefully we can figure out what is going on.

First, let’s put the scale of these market moves into context. On the chart of the S&P500 below we see that in early October last year that index gave up the first bits of its territory. But during November it started to form a trading range, which was broken in December. We see that, from the highs of November to the lows of December, the market fell about 16.5%. Make no mistake, this is a large move in such a short time.

Headlines around the world were comparing that to 2008-2009 financial crisis-like moves.

What is even more astonishing, perhaps, is the strong rebound rally there has been from just before the end of the year until now. As quickly as the market fell, it has mostly rebounded. Naturally a move as strong as that grabbed a few headlines around the world, and the talk was about this having been the best start to a year in many years.

What is important to know is that until the significant resistance level of 2,810 that is indicated on the chart has been breached — or put more plainly, until the S&P500 has regained levels seen during the later parts of September last year — technical analysis theories suggest that the index is still in a bear market.

Well, great — that’s technical analysis of the trend at the world’s leading market. But it says nothing about the underlying drivers, or fundamentals, of the global and local markets.

Starting in the US, during December there was a lot of rhetoric about two main issues — rising interest rates and the trade war.

Looking at US interest rates first: Fed chair Jerome Powell was expected to increase the benchmark funds rate by 25 basis points, from 2.25% to 2.5%. This is exactly what happened. But Powell still surprised when he gave a lower than expected forecast for rate hikes into 2019.

Up to this point it was expected that the Fed would aim to raise interest rates at least three times in 2019.

Instead, Powell had now given guidance of only an expected two rate hikes during 2019. He also mentioned that the Fed would be more "data dependent" when it came to making interest rate decisions in the new year.

He said the Federal Open Market Committee, the monetary policy-making body, had now lowered its forecast for the long-run funds rate from 3% to 2.8%. This development is bullish, as we’ve seen markets celebrate lower-for-longer interest rates.

The second major driver of fear in the US and probably the global market at large was the potentially disastrous outcome of the trade war between the US and China.

There were talks of the US imposing a 20% tariff unless a deal was reached. China seemed unwilling to take the US seriously, as it kept sending lower-ranking officials to talks with the US. The pressure cooker started heating up.

The threat of a full-out tariff war was getting real.

People were beginning to understand that the impact on global trade and the economies of both the US and China was something a lot more complex and unpredictable than they had initially believed.

Since the depths of the panic-driven sell-off in December, some progress has been made. The US and China are now sitting around the negotiating table, and news flowing from both sides is filled with optimism. Perhaps a pinch of salt is needed to believe all the optimism, but what is clear is that negotiation is taking place.

We have also started seeing some real proof that progress is being made, in the form of several large orders of soy beans from the US by China.

This does by no means mean that everything is good and on the way to easy street. There are signs of co-operation, yes, but there are also signs of strains.

For one, imports from the US to China are down 38.6% in yuan terms. The deadline to reach an agreement or face death by tariffs has been extended by 90 days. The latter is, at least, a move that makes sense and will not really raise alarm bells as, well, the nature of a new trade agreement would be immensely complex.

Another set of alarm bells are mixed reports that US-China trade teams are said to be "far apart on reform demands".

The trade war, then, remains a major point of contention and perhaps a risk that the market has ignored foolishly since the start of this year. In that light, we must ask: are lower-for-longer interest rates in the US really something to cheer about, or perhaps a symptom of another underlying systematic problem?

The last of the major international risks that could bring about a bear market is Brexit. Nobody knows what is going on or how to solve the immensely complex problem that is facing the EU.

Perhaps the best explanation I have seen so far on what Brexit really is, was in a tweet from Robert O’M @ipcress saying: "My son asked me to explain #Brexit recently. So, I told him to imagine if he and 27 of his classmates had pooled their Lego [bricks] and built something for years. Then one day, one of them wants to leave and would like his Lego back. The blue ones. My son immediately grasped how complicated that would be."

The outcome of the negotiations is unpredictable. The deadline looms in March. The complexity is immense and this creates uncertainty in the markets. I would expect markets to become more volatile as that deadline approaches.

Keeping score so far, that gives me:

• Bad news turned good news, maybe;

• Bad news still bad news; and

• Who knows.

It leaves us in no-man’s land, which I suppose explains the chart we looked at a little better.

Bringing the focus to our own shores, the picture does not look good at all. Ramaphoria has waned. The excitement is over, as the grim reality of the extent of the corruption in SA has set in.

We have heard testimony that is shocking, yet we have seen no arrests.

Local economic data has not been much better, with retailers reporting poor earnings on the back of slumping sales. Eskom has managed to put a spanner in the works of progress by failing to keep the lights on consistently — or to stay solvent, for that matter — which has been at least part of the driving force behind a very sharp weakening of the rand over a short time.

Taxation has arisen as well, with figures emerging to show that about 4.7% of people in SA are paying more than 90% of the total income tax earned by the government. There is talk of large-scale tax revolt. What is not discussed is that last year the highest number of people emigrating from SA than ever was recorded.

This will no doubt reduce the tax base even further.

On the bright side, there has been a significant discovery of gas off the coast of SA. Though not many details are available yet, the production of 1bn barrels of gas could have an immense impact on our economy by drastically bringing down fuel prices and inflation, generating huge amounts of tax, providing jobs and driving foreign direct investment.

So, answering the question: "Are we out of the woods, or is the worst yet to come?", seems rather difficult. My opinion is that there are just too many unknowns to be able to make any sort of reliable forecast about the future.

Therefore, my view is to keep it simple and straightforward and to rely on good old technical analysis. If the S&P500 index takes out the significant resistance level, I will turn into a bull. Until then, I remain in the woods along with the other bears.