Last week saw major swoons in the stock market and US Treasuries. As of this writing, the sell-off has been continuing. However, I still hold out hope that we could see stocks finish higher than where they are now by year end. Yes, Virginia, there still is the possibility of a “Santa Pause.”
Investors seem to largely be reacting to concerns about the possible escalation of trade wars between the US and China. First came the realization that the Donald Trump-Xi Jinping trade talks at the G-20 meeting did not achieve the results that had initially been reported. Then, later in the week, the arrest of Huawei’s chief financial officer by Canadian authorities at the behest of the US caused a significant amplification of concerns that the US-China trade relationship would deteriorate. And now, with China summoning the US and Canadian ambassadors over the Huawei arrest and threatening formidable action, I am not surprised to see risk assets are still down and Treasury prices are up.
In the background, there are also concerns about a global economic slowdown, which is causing a lot of nervousness and apprehension — and is clearly contributing to the fragility of the stock market. Last week it was reported that Bank of Japan Governor Haruhiko Kuroda was questioning the strength of the global economy, pushing Asian stocks lower. And we have been seeing signs of a modest global slowdown — but not a recession — in various places around the world. For example, third-quarter gross domestic product (GDP) for Japan fell 0.6% quarter over quarter in the final estimate, which was below consensus and well below the preliminary reading.1 And eurozone GDP growth for the third quarter rose just 0.2% quarter over quarter, compared with an average of 0.7% quarter over quarter last year.2.
I also believe the November US employment situation report has added to downward pressure on stocks and upward pressure on Treasuries. Not only did job growth fall below expectations — striking a nerve, given sensitivity to any signs of a global slowdown — but more importantly wage growth remained relatively high, which could constrain the US Federal Reserve’s (Fed) ability to ease up on its plans for interest rate normalization in 2019.
In conclusion, I was a lot more worried in August and September than I am now. Back then, valuations were stretched and I was concerned that investors had become less confident in stocks since the February sell-off, suggesting they would flee the market and turn “risk off” at the first sign of trouble. I felt that markets had overpriced the positives and was overlooking the negatives. such as the potential for the trade situation to deteriorate, at its peril. Many of my concerns have now been realized and, in the process, much of the froth has been shaken out of the market.
While stocks could certainly move lower from here, this is not a time for investors with long time horizons to abandon risk assets, in my view. (In fact, I don’t believe there is ever a time for that, as investors need growth potential to meet their investment goals and are notoriously bad at market timing.) Rather, I see this sell-off is an opportunity for investors to begin writing a “wish list” of investments they would like to add to their portfolios if they have cash available. One such area is technology; after all, some investors couldn’t stomach buying tech at levels earlier this year because of the significant runup tech stocks experienced. Now tech is much more reasonably priced, in my view. In addition, I believe emerging markets – especially Asian emerging markets — are looking more attractive given the potential for the Fed to take its foot off the accelerator next year. And the MSCI Emerging Markets Index is actually up about 5% from its lows this fall.3
It feels like investors are walking on eggshells and have become overly sensitive to bad news. However, I do expect the next few weeks to bring some good news in the form of a kinder, gentler “dot plot” — even if we don’t get a pause in trade tensions. Hence, I hold out hope that we could at least see a modest “Santa Pause” rally by year end. But whether or not we get a rally, I believe it’s critical that investors with longer-term time horizons and investing goals put this market turbulence in perspective – and stay the course.
Looking ahead, we will want to watch the following:
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