As we head into the end of year holidays most friends and clients are focused on spending time with their families and friends. The recent volatility in the stock market can be a worrisome distraction from this focus on community. We wanted to take a moment to share some of what we are seeing, and hopefully eliminate some of this distraction for you.
The stock market is reacting negatively to this week’s Fed decision. Just a few months ago the majority of analysts expected the Federal Reserve to raise interest rates by ¼% in December, and then to follow-up with three or four more ¼% rate increases in 2019. This week’s announcement both implemented the expected ¼% increase for December and reduced the planned 2019 increases to two (from three to four). The Fed is very careful in how they phrase all statements released after their meetings. Investors and analysts were hoping this release would mention future rate hikes would be “dependent on data” or “if conditions warrant.” No such verbiage was a part of the statement. This lack of flexibility has caused worry over the Fed continuing to raise rates even if we do begin to see an economic slowdown. That worry has negatively affected the stock market. Fed moves during expanding market cycles that result in stock market declines have happened in the past. This is normal activity.
As we have stated many times in the past, corporate earnings are the biggest drivers of stock market activity. Most corporate earnings releases are due to be released in early January. A few companies have released in December. Walgreen’s noted year over year earnings growth of 14% and an annual revenue increase of 10%.1 Federal Express said they are still expecting high single digit growth in 2019 earnings compared to 2018.2 Both companies noted positive figures for domestic growth, but slowing conditions outside of the United States. Nike soundly beat expectations and expects their “momentum” to continue into next year. January releases are expected to show domestic corporate profits are growing, with some indications for further growth in 2019. Uncertainty regarding events like Brexit, in conjunction with political instability in some regions, will likely continue to place downward pressure on foreign markets until these issues are resolved.
The broad market is very nervous at the moment. Many investors recall past downturns and worry we may be entering another. The U.S. financial system is in much better shape than it was in 2008. In mid-2017, 30-year mortgages were about 3½ % while today they are around 5%. Unemployment at 3.7% is the lowest since the late 1960’s, but has likely achieved a low point. Inflation around 2% is actually a bit lower than where we would be in a more mature expansion. Valuations on U.S. stocks are around 14 ½ to 15 times earnings compared to 28 times earnings in early 2000. We do expect to see lower growth figures released in January 2019 compared to January 2018 as the effects of the tax cut fade. Profit growth in 2019 will be lower than in 2018, but it will still be growth. There is no expectation that profits will contract, merely that they have come off of their 2018 highs. International markets are expected to see further weakness.
We hope this information helps you better understand where the markets are now, as well as what further market related news you may encounter over the holidays. We wish you the happiest of holidays!