The Dow Jones finished down -6% for 2018, logging a loss of 1496.55 points for the year. It was the worst performance in the stock market since the financial crisis of 2008.
Unlike 2008, other indices are showing great strength, or at a minimum, resiliency, such as wage growth, employment, and consumer spending. If we remain in correction or bear market territory, and losses continue to mount, there still does not seem to be the same conditions for Main Street that would be the same cause for concern as ‘08 presented. In other words, the stock market’s decoupling from Main Street, as we have said so many times before, should lessen the impact on the consumer.
A traditional business cycle downturn in the market is a normal function for stocks, but a lot of the market’s growth pre-Trump was driven by money printing, zero interest rate policy, and quantitative easing. Such massive intervention created artificial growth in your portfolio, fueled by monetary debt. That will have to be unwound.
The “un-winding” could keep markets depressed for some time, as we have been expecting for several years. The natural business cycle growth we have seen over the last couple of years, fueled by tax reduction, regulatory reduction, profits, and job and wage growth, has been a more sustainable, traditional free market expansion of stock prices. That’s good, that’s healthy, but it may not be enough to stave off the needed selling of the artificial excess.
The biggest fears for analysts are the major headwinds we see evident in the market’s decline over the last several months, and that should give you pause when managing your portfolio for 2019.
What are the Top 5 Market Worries for 2019?
- “Falling profits”: Much of the stock market appreciation prior to the Trump Administration was built upon artificial sweeteners from the government. The last two years have been built on the mother’s milk for stock prices – profits and earnings. Apple’s most recent 4th quarter reports of slowing sales in China, and reduced expectations in their forward guidance was reflected across the tech sector and helped drive a market sell-off over the last week. Wages are increasing, we are at full employment, and overseas sales for US multi-nationals are slowing … that is a recipe for reduced profit and therefore – reduced stock prices.
- “China slowdown”: Manufacturing reports showed a decline in China for the first time in 18 months – by itself, no big deal. But the data did not show a slow-down, but an actual contraction, within the manufacturing data. The data has been unprecedented, year-over-year: factory profits contract; steel productions contracts; consumer spending contracts; car sales contract … the Chinese Shanghai Stock Exchange is trading at 27% lower than the previous year – an equivalent drop in the US market would be a 6000+ point decline. China’s growth has ebbed and flowed but always followed an upward trajectory. That has not been the case over the last year, and the warning signs are far more ominous than previous slow-downs.
- “Euro crisis 2.0”: No Brexit deal … another Greek debt crisis … a burgeoning Italian debt default … German politics in disarray … France enduring a revolutionary rejection of the Macron economic policies … Eastern Europe refusing instruction from the EU bureaucracy … social media and the mainstream media may make it feel like things are polarizing in the US, but in Europe, they are actually are, and to very dangerous levels.
- “US Treasuries pull dollars out of markets”: As markets decline, dollars chase return, that will drive investors to US Treasures and the greenback itself. Great for servicing debt, but that takes money out of the private economy. Dollar appreciation shows where the ultimate “flight to safety” ends up, but rapid dollar appreciation can destroy emerging foreign markets and create ancillary problems such as increased migration and strained supply chains. Flights to safety mean Treasuries … and gold. Gold is the ultimate hedge against inflation and a safe investment, but you can’t eat it, and you can’t shoot it. While stock markets may get punished, your portfolio does not have to if you reallocate to principal protection vehicles such as index annuities. As world-renowned trader and analyst Jeffrey Gundlach reported this week: “This is a capital-preservation environment.” Best preserve your “capital” now.
- “Wars and rumors of war”: As the Bible has said, the potential for conflict has never been greater. Wars rage throughout Africa …. China’s leading Admiral has threatened to blow up two US aircraft carriers … Chaos reigns in Venezuela … Russia remains in eastern Ukraine and has annexed Crimea … The Sunni-Shia cauldron in the Middle East could spark the fire of great power conflict between Russia and the US, or a regional war between Iran and basically everyone. The idea that global energy supplies are safe from these events, or that terrorism could not manifest itself within the safe havens of conflict zones, is wishful thinking. War and regional conflict pose direct and immediate risks to how stock markets will perform around the globe.
To repeat Gundlach’s advisory: “This is a capital-preservation environment.”
The market has real worries. Main street may keep its job, and may keep its income, but the overwhelming evidence suggests prices are going down – stocks, real estate, you name it. Your portfolio will face intense down-side pressure. The best course of action is calling your Ty J. Young Wealth Management Advisor now! (877) 912-1919