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The elite at Davos may have just destroyed the 2019 stock market rally

Brian Sozzi
Editor-at-Large

When the wealthy masterminds calling the shots in Corporate America collectively band together and sing from the same hymn sheet and say the state of the world isn’t that wonderful, it’s likely that a market rally built on pure hope is at risk.

So buckle up, the elite downing $40 sushi rolls in Davos may have just stuck a silver spoon right through the heart of the surprising rally in the stock market so far this year.

How else should one view it?

The state of play

Despite depressing reads on fourth-quarter corporate earnings from the likes of heavyweights Apple, FedEx and Delta in recent weeks, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite are up 4.6%, 5% and 5.8%, respectively, year to date. Markets have completely ignored the bad and instead focused on the possible.

It’s possible that the U.S. will meet the March 1 self-imposed deadline for a trade agreement with China. It’s possible President Donald Trump and U.S. House of Representative Speaker Nancy Pelosi will resolve their differences and re-open the government. It’s possible the Chinese government will implement measures to prevent its GDP growth from dropping below the key 6% market in 2019. It's possible Fed policy will fall in-line with slowing global growth.

All of this amounts to pure unadulterated speculation following the December rout that clearly left stocks oversold entering the new year. But the fundamentals of companies simply haven’t warranted the aggressive push higher.

And now, stocks find themselves at key resistance points on the charts and in terms of valuation. For instance, the S&P 500’s forward price-to-earnings multiple has expanded from a December low of 13.5 times to about 15.5 times today. Roughly 16 times was the point from 2018 in which buyers often stepped in, notes SunTrust Chief Markets Strategist Keith Lerner. But, Lerner thinks the 16 times valuation level will be a short-term “barrier” to stocks given the host of concerns the market has chosen to ignore of late, but warrant respect.

What the elite are saying

With a market rally built on such hopium (as market pundits would say in real-time), anything that grabs attention to the contrary is likely to derail momentum. This week it’s poised to be words from the elite hanging out in the snowy Alps of Davos, Switzerland for the World Economic Forum (WEF).

For lack of better terms, the commentary from these well-connected folks has been brutal. The cynic would say the elite are talking down the markets to get in at lower prices for their own wealth building goals. Whatever one believes, the commentary has caught the attention of a too hopeful market.

The Dow Jones Industrial Average dropped more than 300 points on Tuesday.

“We have a real problem in terms of the quantity of debt we have to sell to the world over the next several years,” Ray Dalio, chairman of Bridgewater Associates, said at the gathering on Tuesday. The billionaire turn author went onto fan the flames of a nasty U.S. recession in 2020.

Meanwhile, the International Monetary Fund slashed its global growth outlook for 2019 and 2020 the day before the WEF kicked off. Its growth forecasts for China in 2019 and 2020 — 6.2% — is lower than most top minds on Wall Street have modeled.

Credit Suisse came out today with a doozy of a 90-page “study” looking at global debt levels. A shout out like this in the report does nothing to engender confidence in risk assets: “Defaults are likely to rise in segments of the corporate debt markets once economic growth weakens more markedly or if monetary policy tightens further; in such a situation, an unwinding of positions could generate significant market stress due to illiquidity.”

Credit Suisse Chairman Urs Rohner suggests on the first page of the report that a full-scale global debt blowup is unlikely. But the overall scope of the report is bearish to stocks, trust this writer who read the study in its entirety.

And finally a little observation — executives at Davos have appeared more guarded than the norm in scores of live interviews. Lacking has been the confident sounding headline from an S&P 500 CEO on how his or her business is currently trending or could trend in 2019.

The bottom line

Let the Davos Dip in the markets commence. The first day in the short-term pullback: January 22, 2019.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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