Greetings Friends,
Apparently US investors were naughty in 2018 because there hasn’t been a Santa Claus rally.
That’s too bad. We could have used it. December is turning out to be another brutal month for global and US stocks.
In the US, the S&P 500 is down 12% in December – its worst performance since the great depression.
- The S&P 500 (SPY) is now down 19% from the 52-week high. You can see how sharp this pullback has been in the 2-year chart below. The S&P 500 just coughed up 21 months of gains in the fourth quarter.
- The tech heavy Nasdaq (QQQ) is down 26% from the 52-week high.
- The Vanguard Global Stock Market (VT) is down 17% from the 52-week high.
- Emerging Markets (EEM) are down 25% from the 52-week high.
It wasn’t just stocks struggling in 2018. Almost every single asset class from bonds to grains closed 2018 in the red.
But most importantly, Reid notes that the chart in question showing the percentage of global assets down on a dollar adjusted basis each year since 1901 was “the most requested chart we’ve ever been involved in”, and as updated below, 2018 continues to the be the worst year on record on this measure with 93% of assets currently down -worse than the years of the Great Depression – and up from 89% at the end of October.
Why Did the Stock Market Fall So Sharply?
This pullback has been driven by a few key factors.
Slower economic growth: the global economy is expected to expand in 2019 – but at the same pace as the last two years. According to the International Monetary Fund, the global economy grew 3.7% in 2017 and should expand 3.7% in 2019.
Slower corporate earnings growth: Corporate sales and earnings are expected to expand in 2019 – but not as fast as 2017 and 2018 – which were both huge years for earnings growth.
Rising interest rates are a huge headwind for economic growth and stocks: In the face of slower economic and earnings growth, we have rising interest rates. After keeping interest rates at an all-time low for eight years from 2008 to 2016, for some strange reason the fed decided that they needed to aggressively start raising rates in 2016. Today, interest rates just hit a new 10-year high.
This is a chart of short-term interest rates in the last ten years.
There’s no question that interest rates need to normalize – go up. However, this is a very strange time for the Fed to suddenly completely reverse course on interest rates when the economy and corporate earnings are at the end of the business cycle.
Bottom line here is that rising rates are a huge speed bump for economic growth, stocks gains and home prices.
What Should we Expect Moving Forward?
This has been a very tough pullback – there’s been a lot of pain on the Street.
However, I do not think this is the beginning of a collapse. I don’t think this is another crisis situation.
Bear markets – a 20% decline in stocks – happens once every 3.5 years. You can see that in the chart below.
In the short run I am expecting to see plenty of volatility. It’s clear the market has entered a new phase of volatility.
But in the long run I think US stocks are much closer to the bottom than the top of this move.
If I Own Stocks How Should I Proceed?
For young investors with a time horizon of 10+ years stay patient. Use weakness in the stock market as an opportunity to buy low. Keep making monthly contributions.
For investors approaching or in retirement – if you are feeling nervous there is nothing wrong with getting more defensive.
That could be converting 10% of stock portfolio into cash or bonds.
Don’t make any huge, emotional moves.
Set long-term goals and targets, and make a series of small moves to get there. That’s how you update and re balance a portfolio.
The Big Picture
The fourth quarter and December have been very brutal for the US and global stock markets. Don’t lose the faith. Even though they can be painful these sell offs are a natural part of market and economic cycles.
I’ll be back with another update in the next week to share my outlook for 2019. I’m also contacting all my wealth management clients to setup annual reviews.
- mike@vodickagroup.com
- mikevodicka@gmail.com
Your Investment Partner,
