Leave the Past Behind

by Jason D. Norris, CFA
Executive Vice President of Research

Stocks put in a bottom on Christmas Eve of 2018 and have since rallied close to 10 percent. While December of last year was the worst since 1931, we believe that the worst is behind us. 2019 has started strong, and while Apple’s preannounced earning forecast early this month could have fueled more selling, investors have determined that it’s a company-specific issue, not a macroeconomic concern.

So, what do we make of large drawdown in December of last year? We believe investors selling just fed on itself, coupled with tax loss selling and increasing concerns over the Fed and tariffs. Our belief is that the selloff was overdone. We do not think it had anything to do with a pending recession. As a reminder, not every large selloff is an indication of an economic slowdown. Alliance Bernstein highlights this in the chart below. Roughly one-third of bear markets are non-recessionary and roughly one-third of recessions are preceded by a bear market.


Source: Alliance Bernstein

Although the fourth quarter drawdown wasn’t quite a bear market, as defined by a selloff of at least 20 percent from the recent peak, investors were increasingly concerned about global growth and the Fed tightening too quickly.

While 2019 economic growth will be slower than 2018, it will still be healthy. This should result in earnings growth of roughly 7 percent for S&P 500 companies, which is in-line with the long-term average.


The chart below highlights the recent disconnect in earnings and stocks. Historically, stock prices, as seen in the blue line, follow earnings, represented in the green line, fairly closely. Therefore, when you look at the highlighted area, one would conclude that either earnings have to take meaningful drop or stocks should rally. We are of the belief that at current valuations, stocks are more inclined to rally.


Source: FactSet

Week in Review and Our Takeaways

  • Stocks continued their 2019 positive move this week rising over 2 percent

  • Investors are becoming more comfortable with the path of fewer Fed rate hikes for 2019, coupled with positive momentum on tariff negotiations

  • This renewed confidence has also resulted in investors selling bonds and rates continuing rise