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What's Going on in the Markets: December 22, 2018

Paraphrasing a popular novelty Christmas song by Elmo and Patsy ... "Santa got run over by a rein-bear, walking out to Wall Street on Christmas Eve..."


The proximate "cause" of the market angina this week was the federal reserve's (the "fed") 1/4 point rate hike amid signs of growth slowing around the world. While odds heavily favored the well telegraphed December rate hike, it's puzzling why Wall Street traders often act surprised when it actually happens. Perhaps it was the fed chairman's steadfast insistence on two more possible rate hikes next year, and continued monetary tightening via $50B of bond sales per month.



In reality, the economy is showing some signs of growth slowing, but not contracting (i.e., negative growth). It's contraction in the economy that translates to a recession, something that the weight of evidence still points to no recession on the horizon. Of course, that could change at any time.






    considered to be leading, and usually rolls over before a recession, it’s interesting to note that past stock market peaks have frequently coincided with excessive levels of consumer optimism. Consumer confidence is essential to economic health, because a confident consumer isn't afraid to spend or invest in new ventures to keep the economy growing.
  3. Jobless claims and the unemployment rate are both low by historical standards. Monthly job creation is strong, limited only by the number of available qualified candidates for many jobs. If there's one item that pressures the fed to raise interest rates the most, it's wage inflation, which we are starting to see as the demand for workers outstrips supply.
  5. Signs of cooperation are emerging between the U.S. and China to end the trade wars and end the tit-for-tat tariff jabs. Both countries' markets would celebrate at least some resolution to this tiff.

Now What?

So what's one to do now that the market has taken a big tumble from new highs reached just this past September? The decline has been swift, brutal and almost immune to bounce attempts. In an algorithmic driven and high-speed trading market, risk happens faster than any time before. If you haven't lightened up on your holdings yet, it's probably too late to sell, but consider taking some chips off the table if Santa does come to call on Wall Street and rally after all. After more than a 9 year bull run, it's prudent to not give all your profits back and wait for the next bull market to get back to even. This is not investment advice, as I don't know your financial goals, your time-frame or your risk tolerance. But please feel free contact us to see if we can help you.


What's Next?



A lot of technical damage has been done to the markets, so I don't expect the next rally to be the one to ramp to new highs. Far from it.  Don't be the proverbial mouse to rush into the first market rally trap. Patience is essential--be the second mouse to actually grab the cheese. Any durable rally will last for weeks, if not months, you won't miss out.

Unless the next rally shows signs of a longer term durable bottom, I may be using any strength during the coming weeks to further lighten up positions and add more hedges in anticipation of a sub-par 1st quarter earnings season, and as all the people who didn't want to sell for tax reasons in 2018, decide to dump their shares in January.

That said, I'm starting to see some small signs of the potential emergence of a new bull market, sometime after the 1st or 2nd quarter of 2019. Any one spark could ignite this market to the upside (e.g., China trade agreement, signs of an interest rate pause, government shutdown resolved). So I wouldn't be cashing out of this market given that you could miss the big rebound that could start at any time. This is all speculation on my part, one that you shouldn't rely on for your own investment decisions. My outlook could be wrong, changes often, and could be different, even before the Christmas tree comes down.

Markets Got you Down?

If you're scared or stressed about the markets, here's some advice from Jim O'Shaughnessy, author of several books on investing, including the best seller, What Works on Wall Street:


Chances are very good that when you read it again 12-18 months from now, you'll be shocked you felt this way. Your brain will do somersaults to try to convince you that you *really* didn't feel everything you wrote, because things will have calmed down.

Corrections and bear markets are a feature, not a bug of the stock market. Without them, there would be no equity risk premium. Look back at EVERY OTHER market decline and remember, people were feeling like that was the end too. It wasn't then, it isn't now. This is actually a healthy, if painful in the short-term, action. Most important, remember, this too shall pass."

I couldn't have said it better myself. And as I often quote, Peter Lynch, legendary manager of the Fidelity Magellan fund said that "The stock market is a great place to make money, as long as you don't get scared out of them."



Merry Christmas!


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