The Grinch apparently stole the Christmas rally this year. Even with odds favoring a positive December, the S&P 5001 is somehow now on the verge of the worst December in history (cnbc.com). That being said, a post-Christmas rally appears to be bringing the oversold bounce we’ve been expecting for days now. The big question is how high will the bounce go, and is it enough to get the market moving up again into 2019?
The Federal Reserve raised rates again in December, which, while expected, was another Grinch-like move that didn’t seem to help the markets. But perhaps the hearts of the Fed grew just a little, as they announced they would be less aggressive in 2019 by lowering their estimated rate increases from 3 to 2 (cnbc.com). Raising rates is usually a move to slow an economy that is growing too fast, but we believe at this point, the Fed’s actions could help to finally push us into recession sometime mid-to-late next year. Something we believe is long overdue.
The word “recession” can sound scary, but we believe it can create opportunities that don’t otherwise exist. It is also part of the natural business cycle. Recessions need to happen from time to time. You can’t have good times without the bad, and vice versa. If you’re a believer in a strict buy-and-hold strategy, then recessions could mean hard times ahead. If you’re more proactive, like we are, then you already know how this can be a beneficial market-view in these environments.
On a positive note, the retail sector had the strongest holiday shopping season in 6 years (cnbc.com). We find this to be a good reflection of low unemployment and that the population, in general, has money to spend. It also indicates to us that shoppers have a positive economic attitude: feeling good enough about the economy that they are willing to spend money rather than hoard it, as we have seen in the past (usually during recessionary cycles).
We believe there is room for a short-term rebound here or early in 2019, but the longer-term trend may still be down. This month’s chart is of the New York Stock Exchange Advance-Decline Issues, showing the number of stocks going up vs. the number of stocks going down on the overall exchange. When used with a moving average (a 50 day is shown below), we believe it can give hints as to when it might be time to lighten up on stock market exposure, as we did in September and October.
Six Month chart of the NYSE Advance-Decline Issues w/50 Day Moving Average – StockCharts.com2
Our V33 Indicator remains in “Growth” mode to finish the 2018 year. It will take a really big bounce in the next week for it to confirm a positive signal for the first quarter of 2019. We’re not saying it can’t bounce that high, but the odds aren’t looking favorable. We expect to become even more defensive going into the New Year.
Bonds – The Aggregate Bond index (AGG) had a slight recovery while the overall markets were falling, but remains down year to date at -0.55% (ishares.com). With the continued raising of interest rates, we expect there to be continued downward pressure of the overall bond market. Bank notes, one of the stronger bond sectors this past year, is no longer a haven for safe money. Even with a recent rebound in the Aggregate bond Index, we believe Cash or Money Market may be the place to ride out this storm, for now.
Whatever your plans are for 2019, we hope you and yours are healthy, happy, and safe.
The secret to a rich life is to have more beginnings than endings. – Dave Weinbaum
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
3 V3 is a proprietary indicator developed by Shadowridge Asset Management, LLC. Its objective is to take several market sentiment factors and project how to view US stock market investment in the following quarter: for Safety, for Balance, or for Growth.