Weekly market update
What a year!
At the end of September, everything was going along just fine despite all of the worries on Wall Street—Trade, FED, China, Global growth and Chaos in DC and up to that point the Dow was up about 8%—not bad. The fundamental backdrop was solid—the economy was growing at better than a 3% clip, corporate profits were at the highest levels in 8 years and the FED seemed in control of monetary policy and interest rates.
Then it happened.
In comments to PBS, FED Chair Powell said interest rates were a long way from neutral. That comment garnered headlines but didn’t generate too much attention. Yet, the Dow did drop 157 points that day.
The next day, it fell some more. And then some more. And still more…
Ultimately, the Dow fell to reach bear market status—down nearly 20% from the highs. Most importantly, the market’s worst fear came to fruition—the FED which had the markets back supporting the bull market was now about to change direction.
Suddenly, Wall Street was facing new realities—gains that were taken for granted were in jeopardy, the economy was starting to wobble, trade tensions spiked, Brexit fears resurfaced, Italy and Greece were facing budgetary crisis’s and tweets from the President set off a whole new round of worries.
In the end, the S&P 500 and Dow Jones Industrial Average were down 6.2% and 5.6%, respectively, for 2018. Both indexes posted their biggest annual losses since 2008, when they plunged 38.5% and 33.8%, respectively. The NASDAQ lost 3.9%, its worst year in a decade when it dropped 40%.
What’s more, the S&P 500 and NASDAQ also registered their worst quarterly performances since late 2008, while the Dow logged its biggest quarterly loss since 2009. A sizable chunk of this quarter’s losses came during a violent December, and remember October wasn’t a barrel of laughs either. The Dow and S&P 500 also recorded their worst December performance since 1931.
For the quarter, the S&P 500 and Nasdaq plunged 13.97% and 17.5%, respectively, their worst quarterly performances since the fourth quarter of 2008. The Dow notched its worst period since the first quarter of 2009, falling nearly 12%.
So, did we finally find a bottom? There are no rules for how the market bottoms. Stocks go down a lot, and then they keep going down more until they stop going down, and then they go up, sometimes a little and other times a lot.
Right now, I think to be bearish until proven wrong seems to be the way to make money in this market.
I started doing my analysis for this quarterly report completely open-minded, thinking we may have enough evidence to start looking for long trades to make money on rising markets in the first quarter. But that’s just simply not the case. We are not seeing any evidence that this severe downtrend in stocks is over. Not only are we not seeing “the” bottom, but I also don’t even think we’ve seen “a” bottom.
I really like heavy-cash positions. I still think there is a ton of risk in blindly being long of stocks. I keep seeing reports by analysts talking about buying this weakness.
I’ve been very clear for months that there is a ton of risk out there. I’m not seeing any evidence that things have changed, yet.
But let me be clear, we WILL see a bottom. We will get to the point where the risk is to the upside and no longer the downside. Problem is, at that point, people’s accounts will have been wiped out and they won’t have any money left to get involved. We’re not those people. We’re going to be ready.
So, back to where it all started with the FED, who seems to be smoking in the dynamite shed.
The FED, as expected, raised short-term rates by another 25 basis points, and issued a fairly dovish speech on the economy and slowing growth. The main takeaways were fewer rate hikes expected in 2019, tame inflation, and the big one, was their determination to keep reducing their balance sheet which is effectively like a rate hike and the markets resumed freak out mode.
So, what are some things we’ll be watching as we enter 2019?
- Questions still remain how hawkish the FED will be in 2019.
- Slowing growth in China and Europe could impact the U.S. economy.
- Flattening yield curve will impact confidence in credit and equity markets.
- The impact of the Government shutdown on the markets and the economy.
- No Brexit deal.
- The escalation of a trade war with China and any prospects for a deal.
- Corporate earnings—have they peaked and slowing, or falling off the table.
It’s not all gloom and doom!
The economy still remains strong, despite the consensus that that pace will slow. The labor market is in beast mode—unemployment is holding near a 50-year low. The only problem is we have more jobs than workers to fill them. Corporate profits may slow but from very lofty levels. Currently, the futures market isn’t pricing in any rate hikes for 2019, although the FED is calling for two. The FED doesn’t like to surprise the market. Lastly, there is not a single analyst on Wall Street who thinks we finish lower than where we started (I don’t like seeing everyone in the herd moving the same way).
As always, the rear-view mirror is usually clearer than the windshield, so we’ll find out.
Please stay tuned and we’ll keep you posted. If you have any questions, comments or concerns about how all of this impacts your individual situation, please let us know so we can discuss.
Let’s go make it a great 2019!!
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
January 4, 2019
