2018’s late-year volatility erased gains, and most major market indexes finished in the red for the first time since 2008.
2018 is in the rearview mirror. Let’s peek into our crystal ball as we begin the new year.
1. Leading economic indicators suggest growth may moderate in the first half of 2019, following a trend that began in Q4.
2. S&P 5001 profits likely peaked in Q3, with annual growth of 28.4% (Refinitiv formerly Thomson Reuters). Earnings growth will slow next year.
3. The Fed has penciled in two rate hikes in 2019. It has done a poor job of communicating that its projections are flexible and depend on how the economy performs.
4. Trade tensions are likely to influence action. A deal with China or a workable framework that leads to progress later this year would likely be viewed favorably. Brexit and Italy’s financial situation remain on the radar.
The Dow Jones Industrials1 lost 8.1% and the S&P 500 Index3 shed 8.2% between the Fed’s 2 p.m. ET announcement on Dec. 20 and Christmas Eve (Wall Street Journal). Given the holiday-shortened session on Monday, that’s a sizable loss in what amounts to about three-full trading days.
The Dow is down 18.8% from its early October peak, and the S&P 500 Index has given up 19.8% since its top in late September (St. Louis Federal Reserve data – through Xmas Eve most recent bottom).
A botched attempt by the US Treasury Secretary to calm investors on Xmas Eve and a Fed that can’t seem to communicate its policy stance have contributed to the sour mood. But program-trading likely exacerbated the drop, as a Wednesday article in the WSJ illustrated.
We’re not far from bear territory, which is generally defined as a 20% drop. Except for the 1987 market crash, which saw the Dow lose over 22% in one day, one must go back to 1966 to find a bear market that didn’t coincide with a recession. At the time the economy was slowing sharply, but growth picked up and the expansion didn’t end until late 1969 (NBER).
Putting more meat on the bones of my portion of our outlook summary released last week.
When it comes to the relationship between economic data and the stock market, “better or worse tends to matter more than good or bad.”
Bear markets and recessions are difficult to time accurately, but there are tried-and-true disciplines investors can adopt to weather any coming storms.
Early last week we published our collective 2019 outlook summary and today’s report will put some more visual meat on the bones of that summary.
We’ve been having fun with cartoons over the past few years; all created by Schwab’s talented graphics guru Charlos Gary. Mine for the outlook summary attempted to have fun with the notion that some of the factors which have kept animal spirits in high form over the past couple of years are fading or have left the building altogether.
When Doves Cry
The Fed meeting has come and gone. The Fed moved in a more dovish direction, it offered a degree of flexibility, but not as much as investors had hoped for.
The Federal Reserve hiked the fed funds rate by 0.25 percentage point to a range of 2.25 – 2.50% on Wednesday (Figure 1). The rate hike was not a surprise. The focus was going to be on how the central bank would frame the increase and its outlook going forward.