Market Update - the Dow has its biggest daily point gain ever

Today is a great example of the danger of trying to time the market.  In October, November, and December, investor sentiment began to sour, and the markets trended lower.  The S&P 500 sold off 19.8% from September 21, 2018 through December 24, 2018.  The Dow sold off 18.5% and the Nasdaq sold off 22.5% during the same period.  With market losses mounting, 2018 was beginning to feel a lot like 2008.  However, there are sharp contrasts between 2008 and 2018.  

In 2008, the US (and global) economy was saddled with unprecedented levels of consumer debt, housing was unaffordable, consumer spending was dropping, unemployment was climbing, and the global banking system was on the verge of collapse because of the then current consumer debt levels.  Additionally, the earnings per share of the S&P 500 began to fall.  To make matters worse, the US was still operating under "Mark-to-Market" accounting rules that gave businesses few options other than massive write downs on collateralized debt instruments, which in most cases were still paying more than 96% of their expected cash flows.  

In contrast to 2008consumers in 2018 have the lowest debt to disposable income ratio they've had since the early 1980s.  Housing affordability is closer to where it was through most of the 1990s than what it was in 2008.  Consumer spending has been increasing, and it looks like this will be the best holiday shopping season in at least the last 6 years.  We are also currently enjoying the lowest levels of unemployment that we've had in 50 years.  Further, we don't see any "BUBBLES" like we saw in the housing market in 2008 or in Tech stocks in 2000.  Additionally, since 2008 banks significantly increased the quality of their balance sheets, and US businesses are as healthy as they've been in a very long time.  In short, 2018 looks nothing like 2008, other than that the last few months have been challenging for equities.

We continue to believe the US economy will expand in 2019, and current expectations indicate we may expect to see a 12% earnings growth for the fourth quarter of 2018, with earnings growth continuing all the way through the end of 2019.  We have shared some of our concerns with respect to an inversion of the yield curve, but the Federal Reserve has shown it is aware of the current interest rate environment, and the Fed has signaled that should the data support pausing, it would be willing to pause.  Powell's statement in November, that he believed we were very "near" neutral rates, indicates he may think we won't need any more rate hikes in 2019.  To reiterate our thoughts after the Fed's decision to raise rates, we believe Powell was leaving the door open for future rate increases in the event that the trade dispute is settled with China and global growth begins to accelerate again.  However, he also left the door open to pause raising rates in 2019 should the trade war extend for longer than anticipated. 

Lastly, the US and China continue to make progress on trade; resolving the trade dispute is in both their interest and ours.  It's too early to determine if we will meet the 90 day deadline agreed upon by Trump and China, but if we look at what transpired between the US and Mexico and the US and Canada, we have reason to believe we may very likely have a deal near the currently set deadline.  

Fortem Financial

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