ACM Market View, 7-2-2018

With the first day of the second half 2018 off to a rocky start we wanted to highlight a few key areas that we think investors should focus:

  • Tariffs:  Although this has been the highlight of markets as of late, our focus is to look to who ultimately benefits and who ultimately suffers in the worst case scenario.  Many investors have flocked back into risk assets regardless of the rising geopolitical tensions stemming from the tariffs.  From an economic standpoint, the US with its history of strength may appear to have the advantage here, but they have isolated themselves while other countries such as China have cultivated trade partners in the last two years.  On the surface, the US might seem to be propelling growth via fiscal stimulus, but tariffs threaten the real growth drivers of the most recent economic boom (tech, pharma/biotech, etc) as well as the purported beneficiaries of tariffs (automakers, basic commodities, consumer staples) with margin compression as trade partners retaliate with tariffs in kind.  This has the potential of unseating the market at at time when the Fed has already begun the process of raising rates.
  • Argentina:  With the elimination from the World Cup, it is back to reality for Argentina.  With the IMF loan in place, the real work is in now at the forefront.  Much of the meteoric rise of the Merval index over the last couple years has been premised on an opening of free trade economics and foreign investment stimulating growth.  However the slip in the peso has revealed the ugly balancing act as the quickly devalued peso has left many local Argentinians unable to purchase basic goods or earn a wage commiserate with inflation.  This has the potential to send the pendulum swinging as Argentina remembers its ugly past with the IMF and protest against potential austerity which in either case, could stifle growth.  GDP projections for the next year have already been lowered by economists and market analysts.  Argentina is in a precarious situation; it the global economies slow, Argentina is at greater risk than the most.
  • Oil:  Pundits of Oil prices rising have focused on the benefits to oil shale producers and the cold war that is going on among oil producing nations as reason for prices to continue to ascend.  However, times have changed and the reliance on oil has shifted.  Despite incentives and recent lower oil prices, automakers have begun to make the shift to a fully hybrid/electric line up and the world is moving forward.  Long term shifts aside, in the short term, the volatility of the markets and potential fragility of a continuing bull market will reign in oil prices.  A market crash would not benefit oil prices as we saw in 2008.  Many of the oil producing countries have broken from the pact in order to generate revenue over margin and are willing to produce at lower selling points just to reap some benefit from selling oil while they can.
  • VIX:   Despite the recent rise of VIX with market volatility, the asset continues to trade below its historical average as many investors shrug off geopolitical risks and believe that the government put option will prevent any recession instead of a failsafe against a market collapse.  There are some structural reasons that have kept volatility low, although we saw earlier this year the consequences as the short VIX instruments were shuttered.  The question remains, is the market shrugging off the risks or has VIX become irrelevant as a measure of risk and should we be looking elsewhere as an indicator of fear?
  • Consolidation:  Companies continue to consolidate in rapid succession with the recent acquisition of PillPack by Amazon and the increased bid of Fox by Disney.  Although the consolidation is providing some very lucrative opportunities for select investors, the record breaking price tags are pushing valuations even higher with a potential of a fallout if topline growth fails to achieve promised levels if we experience a pullback.  It should be noted that historically mega mergers such as AOL-Time Warner have failed to deliver on the promise of “synergies”.