Fun Fact Number One: Many people who are not entrenched in the markets are not aware of where the terms “bull” and “bear” are derived from. Typically, these terms are thought to be derived from the actual animals those terms represent. For example: a bull thrusts its horns up into the air, while a bear typically swipes its paws downward toward the ground. With that said, the markets typically move in either of these two directions, and thus the terms bull and bear are utilized to describe performance trajectory.
December proved to be an unstable month for the markets. The trade war and tension between the United States and China, signs of slowing global growth, and overall financial policy changes by the central bank have sent stocks tumbling. Additionally, investors are starting to see a yield curve inversion as short-dated bonds are yielding higher than usual rates. This could all be a sign of a potential recession that could hit sometime in 2019.
A few things to point out throughout the month of December are (in no particular order): consumer sentiment data, wages, inflation, and market performance.
Consumer sentiment has long been the barometer for overall market and economic performance. Consumer sentiment typically dictates how economic spending will trend in a given month, quarter or year.
According to the American Association of Individual Investors (AAII), investors typically feel one of three ways about the market: either they are bullish, bearish, or neutral. The AAII found in their survey ending the week of December 13th that there was great pessimism among individual investors. In fact, they stated that investor pessimism had reached its highest level in more than five years. The AAII stated the following: bullish sentiment related to the possibility that stocks will rise within the next six months fell just about 17 percentage points to 20.9%. The last time investors were so optimistic about the markets was back in May, 25, 2016. Neutral sentiment around whether market performance will remain the same was down 1.3 percentage points to 30.2%. Lastly, bearish sentiment that the market will continue the current sell-off throughout the next six months spiked to a trading season high of 48.9%.
The University of Michigan’s U.S. Consumer Sentiment Index was at 97.5, which is about .5 points higher than market expectations. One thing to note is that consumer confidence in the U.S. averaged around 86.4 points from 1952 through 2018. With this data, we see that consumer sentiment has steadily increased over the years from 1952 through 2018. This could mean that even though the markets are currently in a sell-off, consumers are feeling more confident about the direction of the market. It’s worth noting that consumer expectations declined from 88.1 to 86.1 in the month of November. The chart below shows how consumer sentiment has changed from the beginning of the year up until November.
With that said, let’s take a quick look at wage growth and inflation.
According to the Department of Labor, the unemployment rate was virtually unchanged with a low number of 3.7%. This marks a 50-year low in the area of unemployment. It’s worth noting that 155,000 jobs were added in the month of November. This number was well below expectations and may be sign that the job market is leveling off or staying relatively unchanged. The U.S. Bureau of Labor Statistics (BLS) found that among major worker groups, unemployment rates for adult men, adult women, teenagers, Whites and Blacks, and Asians and Hispanics showed little to no change. The BLS also found that the number of long-term unemployed actually declined by more than 120,000 to a total of 1.3 million people in November. This data tells us that there may be are opportunities for employment for those who are looking for a place to work.
Fun fact Number Two: Smaller companies tend to outperform their larger counterparts. This growth is due in part to the fact that smaller companies have longer sales/trade cycles to grow their business, while larger companies have to bring considerably more in sales to maintain a similar growth rate.
Market Performance: After over a decade of generally stellar performance in the markets, it seems that we are in correction territory. Quarter to date, the S&P 500 had a performance of negative 10.37%, while yielding just below 1% for the year. These numbers are concerning as we move into 2019. December seemingly has been a month where market performance tends to be more in a bullish space due to increased holiday season spending. However, it seems consumers are not equally gung ho about the holiday season in terms of investing. The continued trade war with China is affecting several industries and companies are starting to feel the strain on their corporate profits. Investors are continuing to sell off securities across a broad range of equities. This is concerning, as investors feel a market correction will be coming soon, leading some to move assets into defensive equities. Typically, defensive stocks provide constant dividends and stable earnings regardless of the state of the overall market. While these defense stocks may lose value, they typically will not move in the same direction of growth stocks, for example. As a tactic to stay afloat, investors may invest in high-quality short-maturity bonds such as U.S. Treasury notes (T-notes) and blue-chip stocks. Investors are also moving their assets into banks that are offering better CD rates. Banks are becoming more attractive to park cash assets as the rates that are being offered at banks are moving in the 2.5 to 3% range. Which rates haven’t been that high since the earlier part of 2008.
Overall, 6 out of the 11 market sectors are experiencing a sell-off in 2018 – Materials is leading the decline with a performance of negative 14.15% year to date. Behind Materials is Financials at negative 13.11% and Energy at negative 10.78%. With this performance, it is likely the market will continue to nosedive heading into the 2019 trading season. If this occurs, we may see the U.S. fall into a recession. Investors appear to be worried and uncertain about how to move forward within their portfolios.
Recently, the Fed hiked rates up a quarter of a percent, showing that they are holding true to their goal of easing the economy. After the recent rate hike in December, the Dow saw its worst performance of the year. Investors are concerned as it appears that the Fed has plans to continue raising rates throughout 2019, although at a slower pace than 2018. Federal Reserve Chairman Jerome Powell said the economy at the end of the year was "more subdued than most expected" and recent "developments signal softening" in the economic outlook. From a points perspective, the Dow closed down 352 points, with the S&P 500 and the NASDAQ closing down 1.5% and 2.2% respectively. So some might ask why this is important to investors. When rates are steadily rising, it places a strain on corporate profits as well as rising borrowing costs. Corporations want to enjoy profitability and the ease of borrowing money at a responsible rate. If the Fed continues to raise rates in 2019, we could potentially see a change in the way corporations manage their cash on hand.
You may recall that in 1979 and 1980, the fed funds rate reached an all-time high of 20 points. This was due in part to a weakening dollar after being removed from the gold standard. Additionally, inflation rates more than doubled from 3.9 to 9.6%. In fact, the Fed doubled interest rates from 5.75 to 11 percentage points. When this occurred, businesses were unable to operate at a very high level due to the uncertainty of the market. With that said, the idea of stop-go monetary policy, which by definition is short-term policy aimed at keeping a delicate balance between two seemingly contradictory objectives, such as reducing the unemployment rate as well as the inflation rate. We shall see how these continued rate hikes affect the U.S. economy in 2019.
Debt: The U.S. national debt continues to be a concern for those investors who are interested in U.S. government bonds and notes. Currently, the U.S. debt is still above $21 trillion, which is greater than the entire country’s economic output. All of this occurred due in part to the government not wanting to raise the debt ceiling and the U.S. debit crisis back in 2011. This can be concerning but there are many factors as to why a country’s debt can increase. Sometimes it has to do with the spending associated with keeping the country out of recession and/or with fueling the economy after a recession. As it relates to the U.S., most of the country’s increased spending was in the area of military support due to and responding to national threats. So I’ll take somewhat of a different spin on discussing the national debt in this edition.
It may be more beneficial to look at a country’s debt in relation to its overall economic output (also known as GDP, which is the monetary value of all finished goods and services produced within a country). If we take a snapshot of the debt to GDP ratio for the U.S. for the last five years, we would find the following:
Year Debt (in Billions) Debt/GDP
2018 $21,660 104%
2017 $20,245 103%
2016 $19,573 104%
2015 $18,151 99%
2014 $17,824 101%
So as we can see, the national debt for the U.S. was about $21.6 trillion dollars, with a debt to GDP ratio of 102.2%. These figures tell us that we are currently spending more than what we have coming into the country. Therefore, there have to be some adjustments as to how the U.S. responsibly grows the economy. With looming interest rate hikes, trade wars, and inconsistent messages coming from the government, it will be hard to transcend to the next level and for companies or the U.S. to move toward profitability. If things continue to move in the current direction in terms of spending, the U.S. debt will raise a dangerous level. In fact, the U.S. government has predicted that at the end of FY 2019, the total government debt in the United States, including federal, state, and local, is expected to be $25.86 trillion.
Fun Fact Three: Switching over completely to a $1 coin pieces over physical dollar bills could save the government more than $4 billion over a 30-year period. The Government Accountability Office reports that this is directly a result of the difference between the cost of producing coins or notes and their corresponding face value. A $1 note is expected to last about 4.7 years, while a $1 coin is expected to last in circulation for 30 years.
I recently received a request to briefly explain FAANG as it relates to the markets. I will attempt to explain FAANG to my followers – however, if you are an experienced investor, this may be a refresher to you. FAANG represents some of the world's largest technology companies. The acronym stands for Facebook, Apple, Amazon, Netflix, and Google. Each of these companies has consistently outperformed the S&P 500 over the past 3 years. These five companies are some of the most popular and better performing stocks over the past decade. FAANG stocks tend to be analyzed as the focal point of the overall tech category of the market. Wall Street grouped these companies into one acronym to capture the collective impact that these companies have on the markets. Collectively, these companies are worth more than $3 trillion dollars.
FAANG stocks are important as they seemly show a correlation between technology and the market performance in that particular sector. FAANG stocks are traded on the NASDAQ and are tracked by the S&P 500 Index. Together, FAANG stocks make up a total of 5 of the S&P 500 list, which has a total of 500 of the largest companies trading on the NYSE and the NASDAQ. With that said, the collective upward or downward movement in these tech shares will lead to a corresponding increase or decrease in the S&P 500 index, and in turn, a rise or fall in the market. Up until 2019, FAANG stocks have steadily increased over the past 15 years or so. Historically, the success of FAANG stocks have some investors wondering whether the stocks will be able to sustain sufficient growth over the next few years. 2018 certainly has shown that there is some trepidation when it comes to FAANG stocks. It’s worth noting that these stocks shed nearly 160 billion dollars in market capitalization over the past year. In fact, Apple has seen its biggest stock price decline since the early 90s. According to a recent report by CNBC, Apple shares have plunged more than 20% over the past three months, while Facebook shares have fallen 13%. Amazon shares also have fallen since the company reached a $1 trillion valuation earlier this year – shares of the e-commerce giant are down 22% in the last three months, bringing the company's valuation down to $744 billion, although\ its share price is still up more than 30% in 2018.
As a recap, while consumer sentiment looks good, December was a troubling month in the markets. There’s uncertainty with the Fed, trade wars still lingering, and the a recession looking as though it could happen in the near future. If things continue, 2019 could be a troublesome year for both market performance and earnings.