2018 started with a BOOM and ended with a Whimper.
2018 was certainly an exciting year beginning with the surge in stock prices due to the Trump Tax cuts and ending with a Bear market due to an over exuberant Federal Reserve Board raising rates and a Trade War between two of the largest economies in the world. A few other highlights made this year a bumpy ride for investors such as, the U.S./China trade War, Iran Deal exit, Brexit debacle of Theresa May, Cambridge Analytical Scandal of corrupt Facebook CEO Mark Zuckerberg, the Italian budget collapse, U.S. employment at record lows, NAFTA Reloaded, Apples IPhone estimates and patent problems, Cannabis stocks, self driving cars, Amazon’s new headquarters and everything else Amazon, GE dropped from the Dow Jones, collapse and bankruptcy of Sears, OPEC oil output cuts, AI everywhere, Europe on the brink of another recession, leading right up to the largest one day swing in stock market history and the current government shutdown over a boarder wall (this is NOT about money).
In no particular order let me just touch on a few of these:
China’s manufacturing sector contracted for the first time in over two years in December. The official PMI fell to 49.4, below the 50-point level that separates growth from contraction, while new export orders shrunk for the seventh straight month. China is expected to roll out more economic support measures in coming months on top of a raft of initiatives this year. (Seeking Alpha). Bad news in China is good news for the U.S. China is hurting and quite simply it is a matter of who blinks first, U.S. or China. The strength of the U.S. economy puts the odds in our favor that China will blink first. Apple is a great example of the pain we are feeling from the Trade War. 20% of Apple’s IPhone revenues come from China.
The Italian Parliament has approved the government’s 2019 budget, soothing market angst after Rome reached a compromise with the European Commission last week that averted disciplinary measures. The re-draft lowers next year’s budget to 2.04% of GDP by adding new taxes, such as those on web-based businesses, and aims to drum up revenue through the sale of government properties. It is interesting that all Italians want their government pension but younger working Italians don’t wants to increase taxes to pay for it. Kids these days, go figure!
There is a 50/50 chance that Brexit may be stopped if parliament rejects the government’s divorce agreement with the EU, according to Britain’s Trade Minister Liam Fox. Lawmakers are set to vote on the deal in the week starting Jan. 14. The news comes as Philip Hammond, Chancellor of the Exchequer, was accused by his cabinet colleagues of failing to release the necessary funding required to prepare Britain for a no-deal Brexit. It seems Theresa May will have to pull a sword out of a stone to regain the confidence of all of Britain. Oh King Arthur, where are you when we need you.
I think it is sad to see two old great American companies end up where they are today. Sears and GE are two companies that pioneered the way for the U.S. economy into the 21st century. Ones failing was due to its loss of relevance to todays consumer and the other is due to lack of true foresight and moral leadership’s guiding influence, Sears being the former and GE being the latter. Both companies lost their way and should be a lesson for the new CEO’s of the up and coming new stock market stars. Are you listening Mark Zuckerberg? I doubt it.
Amazon OMG Amazon!!!! I have said for a long time that Amazon is the “Death Star” to America’s retail industry. If Amazon moves into your retail space you will be absorbed like falling into a giant Black Hole in outer space. Apple may very well be the most creative company of our lifetime but Amazon is absolutely the most powerful. Jeff Bezos is a brilliant and ruthless CEO. Stay out of his way.
After the Christmas Eve plunge left the S&P down -19.78% from its all-time high close, and teetering on the brink of a technical bear market, stocks roared back in an historic rebound with the S&P rallying 5.73%, the Dow up 5.83%, and the Nasdaq up 6.32%. (Zacks). This much volatility was primarily due to programmed selling followed up by a panic frenzied buying . First investors could not get out fast enough then greed took over and they thought they were being left behind so forgetting what actually got us here started buying anything at any price. Nothing has changed in the factors that got us here. So much for rational investing.
Last but certainly not least, the Federal Reserve President Powell raised interest rates another 0.25% and made some very irresponsible comments. This last 0.25% bump up in rates was two too many and put the United States perilously close to recession. I know there has been a lot of comment on the turnover in this administrations appointees but Chairman Powell seriously earned the honor of hearing “Your Fired”.
U.S. stocks are rallying ahead of the final trading session of the year amid optimism surrounding talks between the world’s two largest economies. President Trump said he had a “very good call” on trade with China’s Xi Jinping on Saturday, claiming that “big progress” was being made on this front, while the latter said both sides wanted “stable progress.” (Seeking Alphe) I believe President Trump will eventually achieve a positive trade deal for the U.S. I believe we are closer than we have ever been but I thought it would have happened already so I am not about to predict the timing of its conclusion. I am hopeful it will happen in 2019.
The Federal Reserve must reconsider their tightening stance. It is not uncommon for the Fed to over react. If they don’t reconsider their stance then I believe the U.S. is headed for a Fed manufactured recession in spite of extremely low unemployment and one the strongest economies we have seen in many years. This is my biggest worry going into next year. The two year Treasury yield at 2.52% and the ten year at 3.03%, the treasury curve is just too close to going inverted for my liking.
Overall, I am cautious that great things can happen in 2019. I think it prudent and wise to remain defensive until we get further confirmation. In 2017 we were playing all offense. In 2018 we stated out on offense then shifted to defense. 2019 will start out on defense protecting past gains until other opportunities present themselves. We may give up some of the snap back when this market does recover but I believe there is more volatility and downside in front of us. I will remain in this defensive posture until after earning reports starting in late January. I will reevaluate then.
It has been an honor working for you and serving you all of these years. I look forward too many more in the future.
Your Boring Money Manager,
We manage risks first
Then we buy quality
And only then do we seek to provide a reasonable return
At the time of this writing:
Dow Jones 23,327.46; S&P 500 2,507.40; Ten Year Treasury Yield 3.03%; Oil $45.36/bbl.
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Sources: The Capital Group. Zacks, Seeking Alpha, CNBC, CNBC guest and contributors, Jim Cramer, Louis Navellier, Wall Street Journal, Investor’s Business Daily, and Financial Times. Special thanks to Wikipedia and MarketWatch for historical facts. If I have inadvertently missed any other sources please accept my apologies. No assurance can be made that profits will be achieved or that substantial losses will not be incurred in connection with any investment. All investments involve varying degrees of risk including loss of capital. This information should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any individual investment or strategy. PAST PERFORMANCE IS NO GUARR ANTEE OR INDICATION OF FUTURE RESULTS