Bears Coming Out of Hibernation

Dec 21, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Hopefully you had a better week than the markets.  As was expected, uncertainty and fear led to further declines this week.  As of the writing of this piece, only two asset classes are barely positive for the year – cash and treasuries.   Much to the dismay of investors, 2018 is wrapping up to be a big disappointment.  Over 93% of all asset classes have a negative total return to date in dollar terms.  This is the highest percentage on record based on data going back to 1901.  Put simply, there was no place to hide.  Fortunately, these types of years don’t typically repeat and with any luck 2019 will shape up to be a better year.

Part of the decline this week can be directly laid at the feet of the Federal Reserve.  On Wednesday, the FOMC (Federal Open Market Committee) voted to raise interest rates another 0.25%, marking the fourth rate increase this year and eighth time since 2015.  Many, including President Trump, had hoped the Fed would show some caution and perhaps delay a rate hike this time around.  The FOMC did however lower the number of planned rate hikes next year from three to two, which is still above street expectations for just one.  For those searching their memories for the last time equity markets reacted so poorly on a Fed day, don’t worry about coming up empty.  It’s been nearly a generation since something like this week’s selloff occurred on the day of an FOMC meeting.  It was February 1994 when Alan Greenspan surprised markets with a rate hike, sending both stocks and bonds tumbling.  Let’s hope it’s another generation before we see a repeat of this week.

The other part of the decline this week is almost certainly due to uncertainty surrounding a government shutdown which as of this writing appears imminent.  Neither President Trump nor Congress is willing to compromise on the sticky issue of a border wall and more specifically, the $5 billion it will cost.  So much for Mexico paying for the wall.  While there could be a last-minute deal to temporarily extend a stopgap measure for 30 to 60 days, it feels like both sides have dug in and are looking forward to the media exposure in the coming weeks.  If a deal is not reached, there will be a partial government shutdown beginning this weekend.

In company news, Kroger is innovating in new and unexpected ways.  The company announced this week it will launch the first-ever unmanned delivery service.  In partnership with Nuro, Kroger has been trialing a self-driving grocery delivery service in Scottsdale, Arizona.  The fleet of autonomous vehicles has completed nearly one thousand deliveries to the general public.  It is just a matter of time before going into the supermarket once a week will be a thing of the past.  In other company news, stock buybacks hit an all-time record of $1.1 trillion in 2018.  As stocks turned down in the final quarter of the year, many companies announced new buyback programs, including some very large companies such as Johnson & Johnson and Boeing.  This trend is expected to continue in 2019 assuming that free cash flow is not an issue.

We understand this has been a frustrating year in the markets.  The best explanation I came across is an analyst with Deutsche Bank that noted, “peak quantitative easing moving to quantitative tightening and the Fed raising rates four times this year has been enough to reverse a significant amount of the liquidity-inspired asset price returns of the pre-tightening era.  A bit like Road Runner galloping off the cliff only to suddenly look down.”  Essentially, this is where we are.  Will the tightening continue into 2019?  Probably not, at least not to the extent it has this year.  However, this doesn’t mean that we’ve found a bottom in the market.  At the moment there is more pressure to the downside than there is to the upside.  We believe there could be a short-lived relief rally in the first part of 2019, but the pressures of a slowing economy could come to bear.  We are positioning portfolios to best weather the gale force winds we find ourselves in.  We wish everyone a very Happy Christmas and a safe New Year’s Eve.

December 21, 2018

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