There is a long-observed trend in the stock market which, as the 2019 Stock Trader’s Almanac notes, old St. Nick “...tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January.” This rally has yielded positive returns about 75% of the time since 1969.
Given the immense pressure on stock markets around the world since the start of October, investors are begging Santa to show up in the final few weeks of the year with a stocking full of gains. Understanding that momentum works in both directions (both up and down), we are not so sure that Santa will save the day this year.
A question that we have gotten all year is: “if the US economy is doing so well, why isn’t the stock market?”. First, it is important to recognize that, although closely linked, the economy and the stock market are 2 different markets that tend to move in response to different variables. In looking at the stock market, we need to be aware that the stock market is a leading indicator, meaning that it often shows where the economy is headed, rather than where it has been. The economy, on the other hand is often measured by lagging indicators that tend to report what happened in the past. Therein lies the disconnect between the stock market and the economy.
While we do not necessarily believe that a recession and severe economic contraction is imminent, we are growing increasingly concerned about the stock market and its inability to regain its footing after a tough few months. Of course, as a leading indicator, we need to be aware that the stock market may also be giving us some hints with regards to where the economy itself is headed. There are a few very important catalysts that could help stabilize this market:
Reassuring words and actions from the Fed, showing that they might be willing to slow down their rate of interest rate hikes in 2019
Continued positive developments relative to US/China trade talks
Solid corporate earnings reported in January 2019 for 2018’s 4th quarter
From our side, we have been proactive in freeing up 12-18 months of cash for our clients that take annual withdrawals. Between our stocks and bonds, this means that we are well prepared to sustain incomes without having to sell stocks at a low point to free up cash for a long period of time. We are also generally defensively positioned with our hedged stock positions. While it is difficult to watch account values fluctuate wildly, we hope that you can sleep easy, knowing that this is a normal part of the market cycle for which we are well-prepared.