What a crazy week. Sometimes these letters are pretty straightforward. The market did X because Y happened. Other times you are forced to admit you have no clue. This is one of those weeks.
Trading on Christmas eve was brutal. The worst Christmas eve in the Dow’s 122-year history as a matter of fact. Well that’s nice. Certainly, losses on Monday were exacerbated by the ham-handed effort on the part of Treasury Secretary Mnuchin to sooth some fears. He held calls with the large banks over the weekend to make sure they had sufficient liquidity to keep lending. Then he issued a press release telling everyone about it. Well thanks Steve, but this just brought back bad memories of 2008 for absolutely no reason. If anything, his move stirred fears that maybe the Treasury Secretary knows something the rest of us do not.
Oh, and then the President continues to do his thing. Over the weekend he had voiced his displeasure with Federal Reserve Chairman Powell and rumors circulated that the Present might take a stab at firing Powell. These rumors were rapidly downplayed, but the damage was done.
Obviously, anxiety was high coming into Wednesday’s open. The bears took a stab at pushing the market lower, but things turned around and the Dow managed to rally a cool 1,086.25 points, or 4.98%. As it turned out this was the largest point gain ever, and the largest percentage gain since March 23rd, 2009. The magnitude of the rally left a lot of people scratching their heads. There was no news of note. About the best you could say was that the markets were deeply oversold and pessimism was widespread – generally good ingredients for a rally. The volatility index had also spiked to levels that at least outside of recessions/crises have signaled a possible short-term low.
But again, there really wasn’t any news.
Wednesday also saw another first. Specifically, 99.8% of all stocks in the S&P 500 advanced, the largest number on record. The last record was set back in 2011 when 99.6% moved higher. The only loser on Wednesday was Newmont Mining because gold prices took a hit that day.
Looking at the month as a whole, the Dow and S&P 500 are on track to rack up the worst December since 1931. For global equities this will be the worst December since records started in 1969.
If you look at the table above and think there is a disconnect, you are not alone. There were a lot of reasons for down Decembers in 1931, 1930, 1937, and 1941. Great Depression, rise of Hitler, World War II. Even 2002 was tricky given the recessionary backdrop. But 2018? Politics isn’t doing us any favors for sure. Unwinding quantitative tightening is new. There are no historical parallels for this. But growth is still decent. We aren’t staring at a recession/depression, or at least the data isn’t pointing that way yet. The Atlanta Fed is estimating 4th quarter GDP to be about 2.7%.
Is the market telling us growth could be soft in the first quarter? Sure, that’s possible. But we certainly are not seeing rising unemployment claims, a tell-tail sign of trouble ahead. The last number saw claims fall to just 216K.
Maybe the data will roll over in the next few months. That could certainly happen. But for the time being the market shock is feeling much more like 1998 than 2008.
But we will see. The next major catalyst for the market will be the Fed meeting on January 29th and 30th. Questions will swirl going into the meeting. Will the Fed hike? Will they indicate a hike in March? Will the recent volatility mean they take a pause?
The market no longer thinks we will see a hike in March. The odds of a quarter point hike have plummeted in recent weeks, as you can see below.
Guys like Scott Minerd go even further. He thinks there’s a growing chance the Fed cuts next year (see the CNBC article here).
Traders are starting to lean in this direction as well. The odds of a Fed rate cut in 2019 (11.6%) are now slightly higher than the odds of a rate hike (10.7%), as you can see below.
If the Fed pauses or even cuts rates without a recession, then the 1998 analogy holds. Bank Credit Analyst certainly thinks growth holds up next year, for what it’s worth:
“(the) correction has restored some value to global equities relative to cash and bonds. BCA now judges that markets discount an overly pessimistic outlook for global growth. We do not expect the current soft patch in growth to morph into a recession in the coming 12 months, and therefore, we do not expect a meaningful deceleration or decline in corporate earnings to materialize relative to current market valuation.”
Time will tell. Let’s leave it at that for this year. I want to wish everyone a Happy New Year!!! See you in 2019.
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