Review
There was no Santa Claus rally to end the year as the S&P 500 ended down almost 14% for the 4th quarter of 2018 and the worst December since 1931. The significant decline appears to be more sentiment rather than fundamentally based. Investors fled stocks across the board as the fears of trade wars, government shut downs and Fed rate hikes outweighed the strong US economic and corporate earnings data. The quarter was on target to be the worst ever until the US Federal Reserve chair hinted at less rate hikes than expected in 2019. His comments prompted a strong rally the final few days of the year.
Outlook
The first quarter of 2019 could set the tone for the year. The concerns that led to the decline in the 4th quarter could get resolved and push the economic fundamentals either positive or negative. Resolutions, or lack-there-of, with regards to trade wars, government shut downs and Fed rate hikes could be the deciding factor on whether a recession is in the near future or the US economy continues on its strong run.
The most significant resolution may be a trade deal with China due to its effect on both the US and world economies. If a trade deal is reached, it would instantly alleviate much stress on both the corporate and investing worlds. Reduced, or no tariffs, would clarify corporate earnings which are currently uncertain for any company that does business overseas. I’ve discussed before how markets do not like uncertainty. Putting to rest the uncertainty surrounding tariffs and the underlying economic effects could result in a significant positive upswing for the stock markets.
As of today, the US government has been shut down for the past month. If it ended now, there will be only a slight negative effect on US GDP growth. If it lingers on, more US agencies close and we will begin to see a more significant effect on economic data.
The final piece is the US Federal Reserve. There was much debate over the past few months on whether Fed policy may push the US into recession as soon as the end of 2019. Many economists felt that with the lack of inflation, the Fed was raising rates too fast which would ultimately slam the breaks on economic growth. The Fed chair’s comments at the end of December positioned their approach to be less aggressive in 2019. If they rescind on that commentary and continue their aggressive posture, we may be pushed into recession sooner than expected.
Equities
Absent of any economic data changes, we believe the sell-off in the 4th quarter was unwarranted and created a significant opportunity to invest at discounted prices. With some extra cash on the side lines waiting for tax loss selling holding periods to expire, we eagerly anticipate taking advantage of lower prices for long term positions.
Fixed Income
With the Fed easing their stance on raising rates, intermediate term bond positions are looking slightly more attractive than the safety of lower duration bonds.
Alternatives
With inflation showing little to no signs, we are not looking at positions such as commodities to hedge against that worry at this time.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
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