December 2018

What's Next?

After a stellar earning season in Q3, +25.9% year over year, 78% of the S&P 500 companies beat estimates according to FactSet. The market may have made a double bottom on Nov. 23 after the earlier Oct. 29 low. The SPX has gained 3.2% through Nov. 30 while the Russell 2000 was flat and the NYSE index was down 2.7%. The iShares ETF-AGG- representing the Core U.S. bond index is down over 4% this year. Oil dropped 20% from the early October peak with global recession fears and oversupply the culprits. Foreign stock markets swooned through Nov. 30; Germany -18.7 %, Japan -7.7%, China Big Cap Index -9%, and UK -12.3%. With a strong U.S. economy and a strong dollar, U.S. stocks have been the best on the globe in 2018, but can they hold up in a sea of declining markets? Trade war fears and a tightening Federal Reserve policy made the market cry "uncle" in the past two months. Strong earnings and revenue reports were ignored.  Some former market leaders dropped over 20% as money moved into Treasuries, Utilities and Consumer Staples. Two 10% corrections in 10 months plus a 10 year old Bull market were enough to cause investor confidence to cave. What's next? Recession is still not on the horizon. This coming year SPX estimates anticipate a rise of 9%. FactSet sees a forward P/E ratio of 15.1x versus a 5 year average of 16.4x. Fears of peak earnings seem premature. We are likely however to see slower GDP growth and declining margins which may translate to low single digit earnings growth in 2019.  We expect a choppy December due to more tax selling, an interest rate hike expected Dec.19 and trade tweets. The bottom-up target for the SPX is 3163 according to Fact Set if forward estimates are correct. This is an optimistic view indeed. We are now in a late cycle economy when capital spending typically kicks in but the consumer represents 70% of GDP. Channel checks and news from the likes of Boeing show strong backlogs into 2020 and beyond. Will this be enough to keep earnings up and margins steady in a trade war economy? Perhaps not. If trade negotiations go awry and the rest of the world's economies drag us down, the 2940 SPX top on Oct. 3 might well be a cyclical top. Prior post election markets offer some hope of better months ahead. One year after the mid-term election day, markets have been higher 100% of the time dating back to 1946, according to Bespoke Research. There are no guarantees that past performance is prologue in markets. The spread between low and high quality bonds has widened of late and the yield curve is flattening causing us to seek more safety in both bond and stock portfolios.We have begun to experience some yield curve inversion as I write. Color most bond investors confused. Foreign stocks are historically cheap versus domestic stocks but global rates of growth are suspect. Both U.S. and European monetary stimulus is slowing in 2019.    Time will tell how things sort themselves out. We wish you and your families a wonderful holiday season ! Disclaimer: These stock market observations are confidential and proprietary. They are for informational purposes only and are not intended to be used, and may not be used, as investment, legal, accounting, tax, or other advice. No express or implied representation or warranty is being made with respect to their accuracy or completeness. No obligation exists to inform the recipient when the information herein is no longer current or accurate. These observations do not constitute an offer to sell or a solicitation of an offer to buy any securities or interests in any investment vehicles managed by CFA or an associated person or entity, or to provide investment advisory services.