In the final weeks of the year, too many market participants were trying to get positions off their balance sheets at the same time in an environment where economic doubts have started to creep into the picture. After months of Fed balance sheet shrinkage and higher short rates in an economy that had previously been held aloft by ultra-easy monetary policy for a decade, it has finally become obvious that buyers can be hard to find when real selling commences.
Investors have become pessimistic about prospects quite suddenly after having been overly optimistic. Nonetheless, pockets of value have appeared as it seems likely that participants have become too negative in the near term.
In response, the Fed has changed its tune just as abruptly as the market’s mood. Various FOMC members are now tripping over themselves to provide dovish encouragement to investors who demanded reassurances that the Fed was still on their side. It is unseemly, but a sign of the times.
The economy is clearly decelerating, and earnings estimates for 2019 look quite questionable. Key areas of growth like housing are fading. Sherwin Williams is selling less paint and mortgage originations are soft. Retailers like Macy’s did not meet lofty expectations for Christmas sales. Major companies like Apple, Delta, Goodyear, and FedEx have noticed slowdowns in their businesses. Elsewhere, weaker growth in China is negatively impacting the global picture. Germany is perhaps facing a recession.
The cycle’s excesses will continue to be worked out regardless of how trade issues with China resolve themselves, when the government shutdown ends, or whether Brexit takes place in some fashion. The overriding theme will still be that central bank policy was too easy for too long and there will be a payback playing out in coming quarters.
Aggressive selling into year-end has created some value. We are struck by the increase in the number of stocks that trade near ten times earnings. On the other side of the equation, many stocks still trade at very rich multiples, though cheaper than they were just a few months ago. Of course, the overriding theme is that equities are still broadly quite expensive.
In the end, 2018 was broadly the worst year for global markets since 2008, but that was hidden below the surface to some degree as major U.S. stock indices fell by mid to high single digits for the year. Most stocks performed much worse than that and most asset classes failed to provide positive returns.
Investors have become pessimistic about prospects quite suddenly after having been overly optimistic. Nonetheless, pockets of value have appeared as it seems likely that participants have become too negative in the near term.
In response, the Fed has changed its tune just as abruptly as the market’s mood. Various FOMC members are now tripping over themselves to provide dovish encouragement to investors who demanded reassurances that the Fed was still on their side. It is unseemly, but a sign of the times.
The economy is clearly decelerating, and earnings estimates for 2019 look quite questionable. Key areas of growth like housing are fading. Sherwin Williams is selling less paint and mortgage originations are soft. Retailers like Macy’s did not meet lofty expectations for Christmas sales. Major companies like Apple, Delta, Goodyear, and FedEx have noticed slowdowns in their businesses. Elsewhere, weaker growth in China is negatively impacting the global picture. Germany is perhaps facing a recession.
The cycle’s excesses will continue to be worked out regardless of how trade issues with China resolve themselves, when the government shutdown ends, or whether Brexit takes place in some fashion. The overriding theme will still be that central bank policy was too easy for too long and there will be a payback playing out in coming quarters.
Aggressive selling into year-end has created some value. We are struck by the increase in the number of stocks that trade near ten times earnings. On the other side of the equation, many stocks still trade at very rich multiples, though cheaper than they were just a few months ago. Of course, the overriding theme is that equities are still broadly quite expensive.
In the end, 2018 was broadly the worst year for global markets since 2008, but that was hidden below the surface to some degree as major U.S. stock indices fell by mid to high single digits for the year. Most stocks performed much worse than that and most asset classes failed to provide positive returns.
The Fed is clearly coming around to the idea that we have been espousing for months: it will have a very hard time continuing to normalize policy. The ECB will likely conclude this as well. While the central banks will likely become more dovish as the year progresses, rallies on friendlier monetary policy or jawboning should prove short-lived until it becomes clear that the trough in economic growth and earnings are in sight. Most importantly, we can’t emphasize enough that, in aggregate, central banks will be draining liquidity from the global financial system for the time being. This matters a lot as 2018 demonstrated.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.