Markets Get Nothing from Santa This Year

The end of 2018 could have potentially signalled then end of the bull market.

Markets all around the world have faltered, losing positive gains made this year.

So what does this mean for 2019?

Well…let’s take a look.

Earlier this week markets tumbled with the ASX 200 losing $20 billion, the Dow Jones dropping 508 points and the benchmark S&P 500 is now at a 14-month low.

This comes after massive falls already in the month of December.

The loss of $14 billion on the All Ords, has wiped out gains made in the last two years. It’s a similar story for the ASX 200.

And while there was some hope from market analysts, according to the ABC, regarding a ‘Santa rally’, that doesn’t look likely now.

Monday night our time, the Dow Jones was also plummeting, with many now believing that Wall Street has fallen further into correction territory.

What could make investors get excited? Well, as Jun Bei Liu, portfolio manager at Tribeca Investment Partners told the ABC:

Unless the US and China come out with a great deal to be signed in the next few days, I can’t see anything that will get investors excited into Christmas.’

But the likelihood of that is very slim.

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And with the Federal Reserve in the US announcing a rise in interest rates on Wednesday, it has put investors on edge.

The concern lies with how quickly the Fed is raising interest rates. Investors are worried that lifting interest rates for the fourth time this year, while the yield curves are narrowing and fears that the economy is slowing, could all lead to a recession in the near future.

According to the ABC, economists see more interest rate rises in the US in 2019, however at a slower rate than what we’ve seen in 2018.

Market confidence was once again shattered by a tweet from US President Donald Trump, which led to more volatility in US markets and subsequently here in Australia.

He tweeted:

It is incredible that with a very strong dollar and virtually no inflation … the Fed is even considering yet another interest rate hike. Take the Victory!

It also didn’t help that White House trade adviser Peter Navarro fuelled the fire, calling the Fed ‘crazy’ and stating in an interview with CNBC:

We have zero inflation for all practical purposes, so … the only argument I’m hearing for the Fed to raise rates now, is that somehow they have to exert their independence from the White House.’

Furthermore, as we’ve discussed previously, yield curves are at their narrowest in a decade.

And if the Fed raises interest rates again next year? Well, it’s got investors nervous going into 2019.

A nervous wait for investors

As Ethan Harris, Global Economist at Bank of America Merill Lynch, put it:

A common refrain is that yield curve inversion is the best predictor of recessions. Indeed, inversions have preceded each of the last seven US recessions

This historic fact has created an ugly feedback loop in investor sentiment: concerns about the economy and stocks have triggered lower bond yields, which have triggered worries about curve inversion, which in turn have triggered further stock market weakness, and so on.’

The announcement of the interest rate increase send the Aussie dollar falling to 70.99 US cents, the lowest it’s been since the beginning of December.

A Santa rally is almost certainly well and truly out of the question.

So what does this mean for markets in 2019?

Over at out sister publication Markets & Money, Editor Selva Freigedo reported on comments made by  Claudio Borio, BIS’ head of the monetary and economic department, stating:

The BIS doesn’t see these “market tensions” as isolated events, but as part of the journey to monetary normalisation.’

And more is on the way:

It was not the first, and it will not be the last. It was just another bump along the narrow path of monetary policy normalisation.’

While 2018 saw some volatility at the beginning of the year, the second half really saw markets plummet. Inflation is rising, the leveraged loan market in the US is swelling and a weak European banking sector will seemingly pull markets lower next year.

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This week in Money Morning

In Monday’s Money Morning, Harje looks at why he believes 2019 is the EU’s year. Harje expects it will be the EU pushing stocks every which way next year. Talk of interest rate movements will play a role. High debt levels always gets some attention. Harje thinks the continuing crisis in Europe will dominate. It will make headlines, and move stocks in the coming year. A lot of this is actually just noise. What’s really important to your returns in 2019 are the businesses you buy. What’s this stock worth? Is the business growing? Do they have a competitive advantage? What’s the price you’re paying? These questions are far more important than any wider macro event that happens next year. To find out more, go here.

In Tuesday’s Money Morning, Harje explains why he believes the European Union (EU) is destined to fail. Not only are the French suffering under Macron, people of Italy are even worse off. If you read Monday’s Money Morning, Harje wrote about what he thought could push stocks around in 2019. This is it. The political disruption going on in Europe could be a defining moment of 2019. There are a lot of stocks on the ASX that will move up or down because of what’s happening in Europe. But the events in Europe really have no material effect on what these businesses can earn. To find out more, go here.

On Wednesday, Harje discussed why he believes that in the near future the cost to produce something will be fairly even across the world. And what’s going to happen is a reverse of global trade. Domestic production meets domestic supply. China’s cheap labour is no longer an advantage. Automation and robotics make those jobs redundant. It seems pretty obvious technology will be important for this transition. Without it, China will still need to import a lot of advanced goods. However, China still has hurdles to jump. They need to successfully pull people out of two dying industries and put them into another. Maybe they can do it. Next, they might even throw down their communist shackles, you never know. One step at a time. China’s growth story continues…click here to find out more.

In Thursday’s Money Morning, Harje looks to 2019. He believes a potential breakup of the EU will push stocks every which way. Much like US interest rates and US-China trade did during this year. Again, these are all gifts — from Santa to you. With lower stocks prices, potential returns go way up. Stocks that weren’t clear buys before are now worth considering. Some stocks are just so disgusting that most investors don’t want to touch them. These are the stocks you want to be looking at. But there might not be any analysts looking at a $50 million company in an industry no one wants to touch. And this is where your advantage lies — in the small, ugly, unknown part of the market. With a bit of reading, Harje believes probably find a few bargains. They might not be the next Amazon or Apple. But a lot of these stocks are mispriced. And it’s because no one is looking at them. To find out more, go here.

In Friday’s Money Morning, Harje discusses how the Fed is now targeting a benchmark interest rate of 2.25–2.5%. It’s up from their previous 2–2.25% target. Investors were expecting this rise. The Fed also changed their future projections of interest rates. This is what investors weren’t expecting. And it’s encouraged a whole lot of selling. The Fed forecast has fallen. Look at the sketch and you can see the median forecast for 2020–21 is noticeably lower. Fed members now believe interest rates should be lower in the immediate future. If you want to find out more about this and Harje’s advice for 2019, go here.

Merry Christmas,

Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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