Fourth Quarter 2018
QUARTERLY MARKET COMMENTARY
The Fourth Quarter of 2018 turned out to be one of the worst in decades for the stock market. During most of the year the market had modest gains but they were all wiped out by the precipitous decline resulting in losses for the year. Ironically this occurred during a period where most companies reported very strong income and an optimistic outlook for the future. Investors however, have focused on three issues which need to be evaluated.
The Federal Funds rate was raised during the quarter .The Fed predicted further increases in 2019. The Fed has a dual mandate. They act to facilitate full employment but also to ensure that inflation remains under control. Historically when unemployment dropped it created inflationary pressures. But these economic models are likely outdated as the economy is no longer oriented to manufacturing. Capital investments which increase productivity can bring about low unemployment without inflation. Hopefully the Fed will realize that only modest interest rate increases are necessary until signs of inflation being to appear.
Some economist are saying that the economy is weakening and will possibly fall into recession in 2019. While it is true that much of Europe and China are slowing, there are few signs of weakness in the American economy. Sectors affected by higher interest rates, such as autos and housing, have weakened as expected. But retail sales at Christmas were very strong with an estimate of a 5.1% increase. The job market is booming and an increase in employment of over 300,000 individuals was just reported. These are not indicators of weakness. But the market can be a discounter of the future. A recent analysis indicated that the previous 13 market corrections were followed by a recession less than half the time. The economy continued to perform acceptably most of the time. So while we must be mindful that the market decline may foreshadow a recession, it is not a certainty.
The third fear is that the Chinese US economic relationship will deteriorate into a trade war. There are some indications that the tariffs that have been imposed are having an impact. Recent reports show a weakening growth rate of the Chinese economy. The administration and the Chinese government appeared to have entered into discussions in order to reach an accommodation on the trade issues. President Trump has threatened significantly increased tariffs if an accord cannot be reached. While the trade imbalance is very large the real issues, which have been kicked down the road for decades, are the forced technology transfer of American companies to participate in China as well as the theft of intellectual property. The administration is seeking to resolve these issues as they are harmful to American business. While there can be no certainty of a resolution of these issues, discussions continue between the Presidents of each country which is a favorable indication that a resolution fair to each can be reached.
Only time will tell whether these items that have disturbed the market turn out to be detrimental to the health of the American economy. With the decline, however stocks are now selling below historical multiples. History has shown that it is times like these when the markets are under pressure that investment opportunities become available that result in oversized gains.
Please feel free to contact Bert Moering at our office if you would like to discuss these investment opportunity further 561-833-2882.