Market Monitor: December 28th, 2018 Update
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- Resilient bull market nearly ends on Christmas Eve: The global equity market sell-off intensified in the second half of December, including the worst-ever performance of the S&P 500 on Christmas Eve (-2.7%) and bringing the second longest bull market within less than 1% of its technical end (defined as a 20% decline from peak to trough). Investors continue to weigh mostly positive U.S. economic data against slowing global growth, the continued U.S.-China trade war, Fed over-tightening concerns and more recently President Trump’s decision to withdraw troops from Syria, a partial government shutdown, and Treasury Secretary Mnuchin’s comments on bank liquidity. With only one trading day left in 2018 on New Year’s Eve, the S&P 500 is poised for its first annual decline since 2008.
- Fed hikes for the fourth time in 2018 but signals fewer in 2019: The Federal Reserve, as expected, raised the Fed Funds rate by 0.25 percent to 2.50 percent, the highest since March 2008. Its guidance was for two more interest-rate increases next year, revised down from three – yet, still one more than expected by traders. The move and accompanying statement disappointed a fickle market as uncertainty about future rate hikes amid ongoing volatility remains.
- Partial government shutdown reaches one week: No signs of a resolution between Democrats and Republicans over the primary sticking point: funding a wall along the U.S.-Mexico border. Nine federal government agencies have closed since last Saturday morning, as lawmakers and aides appear set for this standoff to continue into 2019. President Trump and certain House Republicans are firm that billions must be earmarked for the wall within a spending package in order to reopen the government.
Chart of Interest
Following a difficult quarter, performance has historically rebounded: While the quarter ended December 2018 will be one of the worst since The Great Depression, data show that solid performance typically follows after one, three and five year periods.
- Volatility returns in 2018 but is normal. There were 66 days in which the S&P 500 experienced a daily change of at least 1% this year, with the number of days nearly evenly split between up and down days. There were only 8 such days in 2017, but from 2010 to 2016 the average number of 1% daily moves per year was 60 days, suggesting that volatility is the norm.
- Markets reacting to uncertainty, not fundamentals as there are few signs of a near-term recession based on the data that we watch closely. The yield curve is relatively flat near 20 basis points (the yield difference between the 2-year Treasury and the 10-year Treasury) and has not only avoided inversion but has actually widened in December. U.S. corporate earnings are still expected to grow by almost 8% in 2019 and the U.S. has never entered a recession with positive earnings growth. We remain constructive on the U.S. economy because of a strong consumer backdrop with unemployment at 3.7% (nearly 50-year lows), GDP at around 3%, low inflation, rising wages at 3.1%, and low oil prices. The Conference Board’s Leading Economic Index for the U.S. also increased by 0.2 percent in November.
- Stock valuations have become more attractive following the markets’ fourth quarter correction. The S&P 500’s forward price-to-earnings ratio stands at 14.5 – the lowest level in five years. In addition, the Equity Risk Premium (Earnings Yield less 10-Year Treasury Yield) is more than 3 percentage points now, increasing the relative attractiveness of equities.
- Diversification benefits of bonds revealed in fourth quarter as only bonds delivered gains as the swift stock sell-off sparked a flight to the safety of bonds. Investors had questioned the role of bonds in portfolios for most of the year as higher rates pressured both stocks and bonds, causing their historical uncorrelated movements to temporarily breakdown and instead move more in unison. Low correlations have now returned to normal as bonds remain a safe haven asset class.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice