Market Strategy 1/14/2019
Leave the Party Hats in the Box and Right-Size Expectations
Key Takeaways
- Stocks rebounded in the first full week of trading in 2019.
- Progress in trade talks between the US and China bolstered investor sentiment.
- Improved communication from the Federal Reserve has reduced, to some degree, expectations of a Fed misstep.
- A rally in the price of oil further improved investor perspective on global demand.
- Economic data released last week showed that inflation in the US continued to moderate in December.
If 2018 in the rearview mirror can be characterized as a year of mounting uncertainties and tensions political, geopolitical and otherwise, 2019 has thus far shown a predilection for signaling a reduction of at least some of the major issues and tensions that challenged the markets throughout last year and tested investor conviction about the economy and markets in the fourth quarter just ended.
It’s not that an “all clear” signal has been sounded over the marketplace (it never has been in our experience nor in our opinion will ever be) but perhaps simply that the noise of a hitherto:
- Projection of an impending recession,
- Expectations of a near-term misstep by the FED,
- Anticipation of a continued plunge in oil prices, and
- Fears the trade/tariff war would ramp higher and turn protracted
was countered by the signal of a reality which presented evidence that a recession was indeed not likely around the corner as persistent expectations by some of a downturn were repeatedly countered by:
- Economic data that signaled instead a spate of interim slowing or a pause in economic growth within an expansion
- The Federal Reserve made efforts to communicate that it could show sensitivity not just to strengths but to vulnerabilities within the economy
- Oil prices rallied as the US and global economy showed some resilience and OPEC reinstated policy to curb oil production
- Fears that the trade war was about to turn protracted and further impact foreign growth dissipated as signs of progress emanated from the latest round of trade talks between the US and China.
As reality so far this year has managed to counter much of the noise that had turned what might have been compared to a sleigh ride for investors in 2017 into a roller coaster in 2018, it’s clear to us (and to many investors we’d think) that we’re not out of the woods yet in what we expect will be a do-over or work-out year as political, geopolitical, economic and corporate matters both negative and positive play out in the ensuing months ahead.
One thing that the US equity market has made clear to us so far since the peak period of the gnashing and grinding of teeth in the fourth quarter is that it favors cyclical sectors over defensive sectors as well as small- and mid-cap equities which were particularly brutalized in the downdraft in the fourth quarter of last year.
We believe that ultimately where the markets take us this year will depend on further and significant progress on trade, continued economic growth in the US and a recognition by investors that the effects of tax reform are unlikely to boost corporate earnings in 2019 in the same way they did in year 1 of the reform. We believe much of the concerns that took the market lower last year into a bottom on December 24th have been priced in and possibly discounted by investors as valuations have become more attractive than they have been in some time.
Prospects that an agreement between the US and China would prove beneficial not just to the two countries but also for most of the world point to opportunities supported as well by attractive valuations in emerging and developed markets even as Brexit in the U K, yellow vests on the streets of Paris, changing leadership in Europe (including Germany and Greece as well as at the ECB─the European Central Bank) and a partial government shutdown stateside capture headlines and point to potential speed bumps ahead.
We continue to suggest that investors consider their objectives and tolerances toward risk, as well as right-size their expectations, know what they own, why they own it and have a realistic view of how diverse asset classes can be expected to perform in different scenarios.
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