Jan 31 2019
January 31, 2019

Fourth Quarter Indicators

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2018 will be remembered by stock market investors as the year of the mental recession.  The underlying US economy appears to be on sound footing.  US company profits are up, and unemployment is down to historic lows.  But the market itself spent the year in a tizzy worrying over US-China trade talks, the very real possibility that the Federal Reserve would raise rates too far and too fast, slowing economic activity in China and Europe, Brexit and, the cherry on top, domestic political turmoil. 

2018 started the year with an upward market trajectory that appeared to have no end in sight.  It ended in December with the worst month in the market since 1931.  The 4th quarter was the worst performing quarter in over 10 years.  And it was the first time that 96% of the asset classes all generated negative returns.  Cash was the best performing asset of the year.

The good news.  The Federal Reserve appeared surprised by the market’s response to the mid December decision to raise rates by another .25%.  The most bothersome for the market was the Fed chairman’s comments which indicated the rate increases would increase deep into 2019.  The market has entered 2019 with a bet that the Fed will not raise rates during the 1st quarter and possibly not again for the foreseeable future. There are even predictions being made that the next Fed move will be to lower rates.

The trade talks with China are reported to be making progress.  The US is demanding that China open its markets to US businesses eager to do business with the growing Chinese consumer base.  But the US is also demanding that the Chinese stop the outright theft of intellectual property.  The Chinese initially presented a very hard response to the US demands, but the negative impact of the trade standoff has severely impacted their economy.  GDP numbers released by the Chinese are always suspect but recent numbers showed the economy had slowed to growth not seen since 1990. 

Any indication that talks between the US and China are moving successfully to a resolution would be a major boost to the US stock market.

The trade conflict has negatively impacted the European economy.  But the European Union was having other economic problems apart from the Chinese.  Add to the concern was the threat that Britain would leave the European Union without reaching an agreement with the EU on how that would be done.  There is the possibility that Italy, Spain and other members of the EU would decide they too would like to separate.  They would begin printing their own currencies and the credit risk would explode. Meanwhile, the European central bank is not expected to begin raising its rates until sometime in 2020.  Europeans are still dealing with negative interest rates.

Oh, another problem for the market was the computer trading.  Any mention of the key words related to the topics just discussed triggered selling.  It was day trading on steroids.

Changes made to the Oak Springs portfolio involved buying on dips, until the dips turned into slides.  We did increase our position in small and mid-sized companies and commodities and reduced our exposure to emerging markets.  The next move will be made based on the results of the US/China trade talks.