2019 has started out as an interesting year for the stock market. The year was set up with a disastrous December 2018, leading to some gloom and doom over the holidays. I recall telling friends in December (following the 5% Christmas Eve drop) that I thought there was a decent chance January would be positive, and if so, take that as a selling opportunity as the rest of the year will be crap.
I was right about January, as the market (as measured by the S&P 500) was up a solid 8%. Time to sell? Now… I am going to answer maybe not. In December the Federal Reserve was signalling 3 rate hikes, and there is an old Wall St saying – ‘don’t fight the Fed’. The saying refers to when the Fed is raising rates, be cautious. Now it turns out, in January the Fed has signaled that it may go more cautiously, presumably because the stock market threw a tantrum. Now there are predictions of a rate cut in 2019, even though the economy is presumably as strong as it has been in recent years.
In my opinion a rate cut may be economic malpractice – but even worse (from a fiscal responsibility perspective) there is now talk that the fed may slow quantitative tightening. This you may recall is the selling off of all the securities the government bought up during and after the 2008 market crash:
Of course we were told that when good times return, the government would sell off those securities and shrink down the balance sheet. And maybe it’s no coincidence that the stock market had a down year in the first year of quantitative tightening. But now there is talk of stopping this drawdown in 2019 or 2020, presumeably over concern that the economy is slowing too fast. The Federal Reserve now appears to be overly sensitive to the movements in the stock market, which for stock investors I guess is a good thing. This removes one big negative factor for the market I had going into 2019.
If the Fed has our back and is working to protect shareholders, I guess I am less negative than I was over the holidays. Other negative factors still exist, such as slowing growth in Europe, continued governmental dysfunction (i.e. the past and potential future shutdown), and Brexit. So I am still not calling for a great year, maybe just not as bad as I thought. I still think we have some major economic reckonings in the future, it’s just that the Fed is now willing to ‘run up the credit card’ to delay the economic downturn.