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The Northern Star 1/3/19 Year-End Special Edition: A Look Back at 2018


Message from Jon


Happy New Year!


With 2018 firmly in our review mirror, we can now look forward into 2019. My reading and data have been offering up quite a smorgasbord of topics, concerns, questions, and, well, more questions.

Will the FED raise or suspend the rate hikes that were once a foregone conclusion for 2019? Will the Trade War get reconciled this year? Will the US economy slow down or slip into a recession? Will BREXIT finally resolve itself in favor of, or against, Britain leaving the EU? These questions are apart from the questions that seem to never stop around President Trump and his code of conduct and seemingly never-ending stream of headlines.

As you might guess, the above is why we pay attention to the data (not headlines) and try our very best to make rational sense of what seemingly is an irrational stream of headlines that vomit all over the public on an hourly basis anymore!

In our opinion, the data suggests that we are in a bear-market condition. As such, we are-and have been since October-positioning client capital in a defensive and protectionist manner.

I spent the better part of last Thursday and Friday sending out emails to clients reaffirming where they are, why they are positioned this way, and what we believe 2019 has in store. 2019 will bear some resemblances to 2018 in that political tensions domestic and abroad will likely manifest in the markets as volatility in our opinion. We also feel that this volatility could increase to the tune of 20-40% leading into 2020, which holds an additional set of concerns and issues that at the moment are not really relevant.

Stormguard is now sitting at below a -3.0% while D/W shows bearish warnings on the majority of the charts we continue to measure & monitor for clients. 1,2

All this information does not automatically invite in a stock market crash or economic recession or anything else. It is simply data we can use to determine the course of action we should take on behalf of clients. Can the market rally during these conditions? Sure. Said rallies tend to be weaker and live shorter than when they happen with stronger undercurrents that promote them. Like I have said for the last quarter to clients: I am okay giving up 5 or even 10% upside so long as the 20-40% downside is protected, because I think we are closer to the latter than we are the former at this point!

2019 will for sure be an interesting year-and 2020, well, that will be a horse of a completely different color, I am sure.

Till we speak again, Happy 2019!

Jon


sources:

  1. http://alphadroid.com/MyPages/StrategiesAG2.aspx
  2. https://oxlive.dorseywright.com/dashboard/8934?


Year-End Special Edition: A Look Back at 2018

WEEKLY UPDATE - DECEMBER 31, 2018

The close of the year provides an opportunity for investors to step back and consider the wider financial landscape. This week, we're reviewing some key issues that defined 2018, as well as some factors that may influence financial markets in the coming year.
Year in Review
Wall Street began 2018 in rally mode, as enthusiasm for the 2017 Tax Cuts and Jobs Act spilled over into the New Year. Strong economic news encouraged investors, who put aside fears that rising inflation may lead to higher interest rates. What Wall Street did not see coming were the spring and summer trade disputes with China, Canada, Mexico, and the European Union. Fear of a global economic slowdown contributed to a sharp decline in stock prices in October. U.S. economic growth forecasts were tempered in November for 2019, with bull and bears engaged in a fierce tug-of-war as the year came to a close.[1]
Economic Growth
After expanding at a middling 2.2% pace in the first quarter, the Gross Domestic Product (GDP) rose 4.2% in Q2 and 3.4% in Q3.[2] The Federal Reserve Bank of Atlanta forecasted a 2.7% increase for Q4, which will be released on January 30, 2019 by the Bureau of Economic Analysis.[3][4] The Congressional Budget Office expects GDP growth in 2019 to slow to 2.4% "as growth in business investment and government purchases slows."[5]
Interest Rates
At the close of its September 2018 meeting, the Federal Reserve raised the federal funds rate to 2.25%, a full percentage point higher than it was a year earlier. Federal Reserve Chair Jerome Powell appeared to change his stance on monetary policy, saying interest rates were "just below" a neutral level. Previously, he indicated rates were a "long way" from neutral.[6]
Consumer Prices and Wage Growth
The number of future interest rate hikes by the Fed may largely depend on its reading of inflation. An uptick in consumer prices or an increase in wage growth may prompt the Fed to consider additional hikes in 2019.[7]
Trade Talk Progress
Tariffs were a highlight of 2018 news. On July 10, the Trump administration announced a list of tariffs on $200 billion in Chinese goods.[8] The escalating trade dispute between the U.S. and China is an enormous overhang on the financial markets. The continuing impasse may affect economic growth and push consumer prices higher.
2018 also was a year in which a major trade pact started to come together. The United States-Mexico-Canada Agreement (USMCA) was approved in principle in October. However, the agreement must be approved by Congress and the legislative bodies of Mexico and Canada before it can take effect.[9]
U.S. Dollar
Rising interest rates and robust domestic growth in 2018 lead to a strengthening of the U.S. dollar. A strong U.S. dollar can negatively affect profits of U.S.-based multinational companies, since it can make their products more expensive to overseas buyers.[10] This will also be something to watch in the coming year. 
Real Estate
The trend of higher interest rates in 2018 was also felt in the real estate market. The average rate on a 30-year conventional home loan stood at 3.95% in January 2018. At year's end, it was hovering near 5% according to Freddie Mac.[11]
We hope you enjoyed this look back at 2018! Next week, we'll be back to covering the market numbers.