As the 4th quarter began, confidence was running high across the economy. Consumers felt good about their futures with a strong job market and rising net worth. Small business confidence was at a record high with 58% describing business conditions as “Good” and 33% expecting to hire additional employees in the next 12 months. The US Federal Reserve Bank raised the fed funds rate in September and the 10-Year US Treasury yield had risen to 3.25% after spending most of the past 8 years below 3%. US Stock Indexes had recently reached new all-time highs and the price of oil had risen to $60/barrel. Most every leading economic indicator was positive, suggesting limited risk of recession in 2019.
Despite all these signs of economic joy, the investment market Grinch took away the punch bowl, optimism faded and most stocks tanked by more than 20% in the 4th quarter. This sudden change of direction can be attributed to a host of monetary, political and economic concerns. While the US Federal Reserve Bank raised the fed funds rate again in December, the yield on 10-year US Treasury Bond dropped sharply to below 2.7%, providing a boost to Bond values and a cushion to diversified portfolios. The Fed was overconfident in the strength of the US economy, wanted to avoid an asset bubble and did not accurately gauge the impact higher interest rates in the US would have on the global economy. After 8 years of priming the economy with low interest rates and quantitative easing, the Fed reversed course and raised the Fed Funds rate 8 times and implemented a quantitative tightening policy over the past 24 months. This restrictive policy had a negative impact on most asset valuations in the 4th quarter and the Fed now appears to be moving toward a more neutral monetary policy.
While a restrictive monetary policy was one cause of 4th quarter losses, trade tensions with China, continued malaise in Europe and the mid-term election results also impacted the markets. These economic and political concerns helped move investors’ sentiment from cautious to pessimistic. Still, many market participants continue to see positives. US consumers and small business owners’ confidence remains high, although somewhat bruised by the negative wealth effect. Importantly, corporate insiders have turned strongly bullish with insider buying ratios showing confidence that current prices offer a good opportunity to buy more shares of their companies. And, in 2018 all 35 of the largest US Banks passed stress tests, showing that our banking system is well capitalized.
As 2019 begins, remember the famous quote from Paul Samuelson, Noble prize winner in Economics, that “the stock market has predicted 9 of the last 5 recessions.” Most experts still expect the global economy will expand at a moderate rate in 2019, which should allow corporate earnings to grow and support higher stock prices. Maintaining a diversified investment portfolio and focusing on your long-term goals remains a prudent strategy whether optimism returns or the recent pessimistic mindset remains.
This article was authored by Christopher Borden, a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions.
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