Riders on the Storm Continued
By John Stoltzfus,
Chief Investment Strategist
Another Brick in the Wall
We look at past periods of volatility for similarities to the current downdraft
A headline in the weekend edition of the Wall Street Journal read: “Stocks Cap Worst Week since 2008”. Whenever we read a caption like that we recall that it’s important to keep things in context. For starters in 2018, unlike 2008, the economy is quite strong. A decade ago we were getting deep into a recession that had been caused by a combination of decades of increased leverage in the financial world, years of deregulation and a bull market in residential real estate that had begun in the early 1950s and which by 2006 had turned into a bubble inflated by subprime mortgages.
US economic growth in 2018 is shaping up to be the strongest in several years. Corporate earnings through the latest earnings season reported for the S&P 500 showed earnings growth of a little better than 26% on the back of just under 8% revenue growth. Eleven years ago we entered a recession in December, 2007.
That said, there’s plenty to worry about in 2018 in terms of geopolitics, domestic politics; an as yet unresolved trade war with China; fiscal and trade deficits—among a host of what have become “the usual suspects” or “worries du jour” which are perfectly worthy of concern but based on modern history are not likely to result “in the end of the world as we know it” or in our view “the end of this bull market.”
“History may not repeat itself but it often rhymes” - adage attributed to Mark Twain
From our perspective on the Market Radar Screen we’d say it’s comforting to think like Twain when considering what’s been going on in the markets over the past 12 weeks— eight of which have ended in declines for more than a few major equity indices.
“If 2019 turns out like 2016 did then the past 12 weeks might just be another brick in the wall of worry for the bull market to climb.”
What loudly and clearly in 2018 rhymes to us is the similarities of this year with 2015 and the first seven weeks of 2016. That period saw considerable volatility in the markets. Plenty of fear was generated back then as well among market participants and observers, along with an increase in bearish calls for the end of the bull market and enough down days to turn even more of our hair grey. The most talked about causes we recall for that spell of volatility some three years ago involved China, the Fed and plummeting oil prices. In aggregate those “three horsemen” helped 2015 contribute to a negative return for the S&P 500 for that year as well as a swoon into the first seven weeks of 2016.
The particulars of that period in 2015-2016 were somewhat different in that: the Fed had just begun the current rate Fed hike cycle with one hike in December 2015; China after having maintained its currency at artificially high levels for a decade had devalued its currency (the yuan) twice (in August 2015 and again in January 2016) causing fears of a potential hard landing in China.
The price of oil had been falling in 2015 and in February of 2016 hit a low of around $26 (on February 11th). Back then oil was falling as a result of overinvestment in the energy complex that resulted in production surpassing near-term demand.
In the current cycle the decline in the price of oil is tied to OPEC having stopped its production restraints a few months ago to compensate for oil expected to be taken out of the market as a result of the reimposition of US sanctions against Iran. At the same time US producers ramped up their production.
In 2018 the Fed has hiked its benchmark rate four times (for a total of just 9 hikes in a three year period vs. the last cycle from end of June 2004 through end of June 2006 when it raised rates 17 times in a two-year period). From June 2004 to June 2006 the Fed raised its benchmark rate from 1% to 5.25%. This latest cycle (so far from December 2015 through December 2018) it has raised its benchmark rate from a band of 0-0.25% to 2.25 -2.5%.
What should one do here?
For now we reiterate our call for investors to watch for “babies that get tossed out with the bathwater”. Times of market turbulence can cause investors to focus so much on downside risk that they miss opportunities befitting of the old adage to “buy low, sell high.”
If 2019 turns out like 2016 did then the past 12 weeks might just be another brick in the wall of worry for the bull market to climb.
In a Christmas holiday abridged week we expect that holiday travel bound traders and investors won’t stray too far from their technology to track any developments that might rattle or assuage the markets’ temperaments.
Last week’s volatility and downside proclivity caused us to postpone our initiation of a target price and earnings estimate for the S&P 500 in 2019.
We now expect to initiate sometime before the New Year.
We wish our readers all the best for this holiday week.
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