The stock market’s 20% + return in 2017 led investors to approach 2018 feeling optimistic about the probability of the continuance of the good times. The market’s 10% return in the first three weeks of January last year seemed to confirm the likelihood of the fulfillment of that hope. Alas the market gave that all back and then some leaving most investors underwater some fraction of a percent by the end of March. The second quarter saw a modest recovery with most investors near breakeven at mid year. The third quarter saw the restoration of good times with returns of 3 to 4%. October the market rolled back over with many investors experiencing declines of near 5% for the month. November the market attempted to regain its footing with modestly positive returns but then December repeated the negativity of October creating additional losses of near 5% resulting in declines of 8 to 9% for the quarter and overall declines of 6 to 7% for the year. Note these are portfolio returns with weightings of 60% stock market and 40% bonds and cash. Investors with greater exposure to the stock market would have experienced somewhat more negative returns.
If we were to end our story here it would be a tale of moderate woe but the recovery in the stock market since Christmas has seen the market recover approximately half of its almost 20% decline from its September peak to its low of the year on Christmas Eve giving the average investor back half of their 2018 losses through Friday, January 17. So do we dare to hope that we need not fear the return of the market negativity we experienced a month ago or would it be wiser to hold onto our fears and forego our hopes?
While forecasting the future is an exercise entered into with the utmost of caution that should not preclude our grasping hold of what we know and using that to make a reasonably educated prediction of what 2019 may be offering investors. First the market decline of late last year was the market reacting to the probability of a significant slowing in the growth of corporate earnings through the first half of the year resulting from a slowing of the rate of economic growth. While viewed in isolation that would scarcely be viewed as good news it will likely create a policy response that will likely lead to a notable rebound in the stock market. The Federal Reserve having been unnerved by the market volatility accompanying its most recent interest rate increase will likely cease any additional increases through the first half of the year and possibly for its entirety. The trade dispute with China has already led that country to reopen the spigots of using borrowed money to build out infrastructure. The US political system with its divided congress defies hopes of building bridges to bipartisan understanding but a divided congress will nonetheless likely agree on the need to repair this countries bridges, airports and other parts of our infrastructure resulting in additional stimulus to our economy. All of these policy responses and others as well will lead to a rebound in economic growth rates in the second half of this year both in the US and globally. This is likely what the stock market is currently celebrating.
Investors should be encouraged to smile as they contemplate what this year has on offer. We have issues that will need to be addressed in future years but for 2019 its full pedal to the metal and investors should celebrate the reality that for this year at least they are an interest group whose interests the government is actively supporting.
Mark H. Tekamp
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