December Month End Commentary

With 2018 coming to an end, it is helpful to look at how crazy and volatile the year has been. 2018 has been the most volatile year in the markets since the 2008 great depression finishing with the worst December since 1931 in the Great Depression! The financial markets have experienced more days of 2% moves than the last 9 years combined as President Donald Trump continues to place his mark on the US economy.
 
The pullback in the markets over October, November and December have been of Donald Trump’s making. His fiscal policy has led to an increase in the US government’s deficit, creating fears that the economy is overheating and leading to the Federal Reserve chief, appointed by the President, to be hawkish due to his worries that the inflation will pick up from an economy that is running too hot. To make matters worse, Donald Trump, who bragged during the markets mercurial rise in 2017, has begun applying pressure upon the Federal Reserve to modify their monetary policy.
 
The Federal Reserve is an independent federal agency with twin objectives of controlling inflation and keeping the economy at full employment. As a result of Donald Trump’s policies, the Federal Reserve believes that US economy is running above growth capacity and beyond their definition of full employment and as such, are required to aggressively raise interest rates to stamp out any inflationary pressures. To make matters worse, the President’s twitter comments on the Federal Reserve has backed the FOMC into a corner of continuing raising interest rates to remain appearing independent from outside influence.
 
Moreover, there has been a slight deterioration of economic data from the beginning of the year as the Trump Tax Cuts have acted as a sugar high for the markets forcing the Federal Reserve to believe that the economy is still fine and that wage inflation is creeping around the corner like the bad guy in a Horror B Movie from the 80s.
 
Each time the financial markets have corrected in 2018, it has been a direct result of hawkish comments from Federal Reserve President Jerome Powell. This came to crescendo on Wednesday December 19th, when he raised interest rates for the fourth time in 2018. In his press conference, he stated that he was not worried about the equity markets and that this was not a factor in the FOMC’s decision making. This led to the financial markets reacting violently to the downside as they collectively said “Excuse me, watch this”. Under Jerome Powell’s leadership, the Federal Reserve seems possessed to normalize interest rates while the economy continues, even if it has negative implications on the financial markets.
 
Additionally, uncertainty remains high for the world economy as the trade tariffs from Donald Trump’s administration protectionist trade tariffs on Chinese exports remain in an uncertain position. At the G20 meeting in Argentina, Presidents Trump and Xi had a meeting and arrived at what appeared to be a deal, only for the deal to become another one of Donald Trump’s countless lies, and add more uncertainty to the financial outlook. We believe that there will be a resolution in 2019 as Donald Trump heads towards his 2020 re-election campaign with a potentially sputtering economy and fighting a democratic controlled House of Representatives.
 
Furthermore, more and more market participants are talking about a recession in 2019-2020 and these fears were exacerbated by the Federal Reserve projections for interest rates as they indicate that the Fed will need to raise interest rates two more times in 2019 and then potentially cut rates in 2020 to assist the economy. This did not help combat the narrative that a recession and economic slowdown is barrelling towards the international economy.
 
There are many forces pulling on the markets and the end of the year can be a period of a lack of market participants willing to make any financial moves entering year-end holidays. As such, the financial markets have been characterized by a lack of buyer and as such sellers have created havoc on the markets with the S&P 500 down almost 13% in the month of December alone. Finally, on the Friday before the Christmas holiday, President Donald Trump adds more volatility into the mix with a government shutdown over his demand for a border wall, much like a petulant toddler throwing a temper tantrum for not getting what he wants.
 
The financial markets are extremely oversold and the lack of rationality in the markets has made us extremely reticent from caving to the market irrationality and being a part of the capitulation. 2018 has many similarities to 1994: Investors are unhappy because the Fed is raising rates even though inflation appears quiet. The president is ready to slap tariffs on the world’s No. 2 economy. The media and Congress are putting pressure on the president that may result in an impeachment vote. The stock market had been doing well early in the year, but was slammed in the second half. 1995 to 1999 was an unbelievable time to be invested in the markets and is among the best five year stretches in stock market history.
 
When we look towards Canada, the Canadian economy and stock market will follow the United States which is why we are so focused on what is happening to our southern neighbour. The weakness in energy prices does not look good for the Western provinces but at least our central bank is employing a cautionary policy to protect the Canadian economy.
 
There is a lot of fogginess on the economic front which we believe will become clearer in the first quarter of 2019. It is quite hard to stay rationale during irrational times with day after day of triple digit declines in the market. While the economic conditions are softer than the beginning of 2018, the economy still is growing and earnings growth forecast are still expected to be in the 8-10% range for 2019. There has been no major fundamental change to our thesis for owning stocks and it is days like this I am reminded of sitting at my desk in 1987 with my father on Black Friday and that as quickly as the market unraveled, that it bounced back over the course of 1988 and pushed for new highs throughout the 1990s.
 
We are here to help and chat if you have any questions or concerns. We are not happy riding the roller coaster of volatility but we believe that 2019 will allow for calmer heads to prevail and allow for markets to rebound on positive news.
 
Debbie, Chris, Mark and Rosemary