Market Update December 2018
The past several weeks have been challenging in the stock markets – lots of ups and downs, and overall in the past 2 months, the S&P 500 (US stocks) was down 9% from its high and Canadian stocks were down over 9% since their high in July *. Your statement values may have lost several months of gains. However, this week was more positive.
So what is going on? There are several reasons why the markets are behaving this way and all have to do with uncertainty. There is uncertainty about trade disputes between the US and China. Tariffs have been added and in January there are more tariffs scheduled to start between those 2 countries. There is uncertainty about how much the US Federal reserve and the Bank of Canada will increase interest rates going forward. They have been steadily increasing rates and on October 3rd, the chairman of the Federal Reserve said ‘we’re a long way from neutral on interest rates’, which seemed to start a lot of the volatility. And finally, governments are moving from quantitative easing, which started in 2008 after the global financial crisis, to quantitative tightening, after 10 years.
The uncertainty is because all of these things will have an impact on inflation, pricing and corporate profits. And stock prices are based on earnings of a company, so if costs are higher, then profits will be less than they have been.
With the stock market, there are regular pull backs, and then things go up again when the economy is strong. When there is a recession, prices of stocks go down and then eventually they start to climb back again when the economy improves. It is a regular cycle. So everyone is always watching for when the next recession will start.
So let’s do a reality check – is there real risk in the markets? From everything that I hear, read and see we are late in the economic cycle, but not at the end and there is a difference. The US economy is strong; inflation is low and technology is helping keep it that way i.e. companies like uber and airbnb are deflationary. Earnings are great for companies. The S&P500 companies have seen 8% growth in their revenue, 22% growth in net income and 25% growth in earnings per share*. Corporate US margins are all at time highs. Valuations are reasonable i.e. 16X earning. And consumer confidence is high. The chance of a recession in 2019 is predicted to be low.
An analogy is that we are in the 3rd act of play. You don’t want to leave yet because the best may be yet to come, but you may be thinking in the background of how to get out of the parking lot.
At the G20 session this week in Argentina, if Trump and President Xi find some common ground and avoid an escalation of the current tariff skirmish that should be good for the stock markets. Markets were up this week after some good news on the weekend and some comments from the Federal Reserve that they may be more conservative in their interest rate hikes.
No one knows for sure what will happen, but this is how things look today.
My best advice is to continue to invest in quality companies that are growing, and growing their dividends. Try not to pay too much attention to the news. The headlines are trying to ‘sell papers’ and there is definitely more a focus on bad news than good.
As always, any questions I’m happy to answer.