Tuesday, January 21, 2020
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Will Davos mark the top again?
The World Economic Forum at Davos kicks off today.
This year’s gathering of world leaders will include appearances from President Donald Trump, German Chancellor Angela Merkel, European Central Bank President Christine Lagarde, and climate activist Greta Thunberg.
The 2020 edition of Davos also takes place against the backdrop of an improving global economic outlook, and financial markets that have surged over the last few months as a result. It’s a backdrop eerily similar to what prevailed ahead of the 2018 edition of Davos.
And for investors looking for reasons to be nervous, these parallels will not be a welcome observation. At Davos 2018, Ray Dalio declared that investors would be “pretty stupid” to be holding cash just months before cash started yielding something for the first time in a decade. This meeting also marked the top for an 18-month post-election market rally: Investors would endure another 18 months of volatility before making new highs.
Back in January 2018, Yahoo Finance Editor-in-chief Andy Serwer wrote, “the mood at Davos this year is decidedly upbeat, actually the best in memory at least according to one long-time attendee.”
“And that may not be such a good thing,” Serwer added. “‘That must mean it’s all going to crash,’ joked Larry Fink, after I relayed that optimistic observation.”
Two weeks later, no one was laughing — the market had gone haywire.
In February 2018, “volmaggeden” hit markets, sparking two 1,000-point drops in the Dow in four sessions, and kickstarting a year for markets that turned out to be the worst since the financial crisis.
Like 2018, this year’s Davos features an appearance from Trump, fresh from securing an economic policy win. This past week, Trump signed a phase one trade deal with China. Just weeks before Davos in 2018, Trump signed the Tax Cuts and Jobs Act.
The S&P 500 has also seen its valuation reflate in recent weeks, and currently trades around 22 times earnings — its most expensive level since March 2018. In January 2018, the S&P 500 traded closer to 24 times earnings. By December 2018, the S&P’s multiple contracted to around 16 times earnings.
Helene Meisler at The Street wrote late last year that despite some cosmetic similarities between the late 2017-early 2018 market and the current environment, it’s unlikely we’ll see the same kind of volatility-focused event break out again.
The entire post-crisis market environment backs up this view: Investors moving money out of stocks as the market hits new highs shows a continued attitude that people are still waiting for the next shoe to drop. Investors, like generals, are always fighting the last war.
But because an adverse market event related to volatility-linked products might not be in the offing doesn’t make comparison between this year’s Davos and 2018 entirely moot. Davos — and the thought leader set the event attracts — is often a great contra for the market.
In 2017, the event’s attendees “struggled for answers” after Brexit and Trump’s election. That year, the market went up nearly 20%. In 2019, the economic outlook was darkening; last year, the market went up almost 30%.
And so, whether you fear the current rally or not, pay at least some attention to the annual gathering of global elites in the Swiss Alps. They might just tell you what’s not about to happen.
What to watch today
6:45 a.m. ET: Halliburton (HAL) is expected to report earnings of 29 cents per share on $5.09 billion in revenue
4 p.m. ET: Netflix (NFLX) is expected to report adjusted earnings of 79 cents per share on $5.45 billion in revenue
4:10 p.m. ET: IBM (IBM) is expected to report adjusted earnings of $4.69 per share on $21.64 billion in revenue
4:15 p.m. ET: United Airlines (UAL) is expected to report adjusted earnings of $2.67 per share on $10.88 billion in revenue
Other notable report: Capital One (COP)
UK employment rate hits new record high [Yahoo Finance UK]
Facebook to create 1,000 new jobs in London [Yahoo Finance UK]
YAHOO FINANCE HIGHLIGHTS