JP Morgan’s Warning

JP Morgan again warned the S&P 500 will plunge, the result of “long term low volatility and banded trading.” The bank is concerned about policy shifts, geopolitical tensions and political tensions.

As noted several times, the vast majority of the world’s largest managers — Fidelity, Vanguard, Blackrock, JP Morgan, Merrill Lynch — have all warned of an impending drop.

In some regards, this is bullish for rarely does an expected event occurs. For example, on January 1, all expected the dollar to continue to rally. It is now at levels last experienced in 2015 and may fall back to levels experienced in 2014 when the current rally commenced.

Many industrial commodities have surged in 2017 again defying predictions. And then there is the emerging market rally, a rally few suggested would occur.

Most are now acknowledging a global tectonic change is occurring. These changes occur every generation or about every 25-30 years. In my view, yesterday’s globalism is becoming altered. The altered form is not yet known, but may greatly impact the S&P 100 given their globally interconnected methods of production.

Many times I have remarked about the outsized influence that ETFs, algorithms and indexing have had upon market averages, a view that is now becoming mainstream. This trading strategy is momentum based, defined as the big gets bigger and the small gets smaller, based upon a preconceived set of parameters. What happens if these variables radically change, a change that is inevitable according JP Morgan and others?

I reiterate my long held view the economy will continue to accelerate at a pace much greater than expected that alters the inflationary outlook, threatening current valuations of the largest capitalized names.

In six months, will I be writing about an oil supply shortage that forces prices 50% higher, the result of greater demand and from massive infrastructure cuts? This scenario unfolded 15 years ago and has already unfolded in other parts of today’s commodity markets.

What about housing? Will OER suddenly accelerate? July’s new home sales were disappointing, but the reasons why they were disappointing are inflationary….the lack of supply, available lots and workers that are causing a rise in prices.

There are always winners and losers in change. Companies that benefited from reduced production costs because of outsourcing labor to low cost countries, thrived during the last thirty years. This includes many retailers and technology concerns.

Will tomorrow’s winners be those companies that are focused on domestic production and sales as Main Street America recovers? Only history can answer this question, but I am certain that I will again write life is always stranger than fiction where change is the only constant and the unexpected occurs.

Commenting about yesterday’s market activity, equities fell between 0.40% and 0.30%, while Treasuries gained on the prospects of a government shutdown. Potential tax reform, the catalyst for the prior day’s advance, was perhaps the headline that prevented a larger sell off. Oil advanced on a draw down of inventories, inventories which are now at the lowest level in 19 months.

Last night, the foreign markets were up. London was up 0.51%, Paris was up 0.27% and Frankfurt was up 0.37%. China was down 0.57%, Japan was down 0.42% and Hang Sang was up 0.43%.