The equity markets this past fall, and especially in December, plummeted into a hair-raising decline. January has seen a rally and the markets have recovered much of the losses. But is this a short term bounce? Will investors who buy in thinking the decline is over be whip sawed?
Words have power
In the February 2nd edition of Jerry Tuma’s Smart Money Radio on 660 The Answer in Dallas-Fort Worth, Jerry said that the market may be experiencing a “relief rally”. Jerry believes that a combination of issues affected the market decline, most importantly the Federal Reserve’s policy of Quantitative Tightening, even more so than interest rate hikes. In October Fed Chairman Jerome Powell said that the policy for QT was “on auto pilot”. That sent investors toward the exits. This caught the Fed’s attention and it began to dial back the rhetoric that was panicking investors.
Earmarks of a market top
The telltale signs of a market top were in place when the market began to deflate last fall. Margin debt was at record levels, forward looking price to earnings ratios were high, earnings projections were overly optimistic and stock leaders, the FAANG stocks began suffering sharp losses due to earnings disappointments. Prior to the decline, corporate stock buy backs helped keep the market propped up.
Now that earnings have slowed, the U.S. economy has started to lose momentum. We are not in an economic recession, but seem to be in an earnings recession.
World economic picture
Outside of the U.S, Europe’s economy continues to erode. Germany is Europe’s largest economy, but it has slowed and the German government has proposed raising the tax rate on the middle class from 42 percent to 45 percent. (Source: Reuters June 2017) This is misguided because tax increases take disposable income out of the consumers’ hands, slowing the economy even further. Japan’s economy is slowing. China is launching a $370 billion stimulus to try to spark growth, equal to 3 percent of its economy. (Source: Asian Review January 2019)
Then there’s the black swan
Another factor that is currently unknown is what may be lurking in the financial markets that may have gone unnoticed. In 2008 it was the tranches composed of high risk mortgage backed securities that no one anticipated would blow up the financial system. Whenever there are long periods of rising financial and economic markets as was the case then and now, someone, somewhere, is often playing fast and loose with other people’s money. When the business cycle turns, it often exposes these shenanigans to everyone else’s hurt.
Watch for Jerry’s Special Report
In February Jerry will be sending a special report on the markets on the economy with a look ahead to this new year.
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Listen to the latest edition of Jerry Tuma’s Smart Money Radio.