The Grinch that Stole Christmas – C.J. Lawrence Special Market Commentary – 12/26/18 by Bernhard Koepp

A perfect storm of policy missteps is to blame for the current 20% market correction off the October high. The main culprits are:

  1. Unresolved trade dispute with China
  2. Fed Tightening/Miscommunication
  3. Government shutdown over border wall
  4. Trump cabinet resignations
  5. Treasury miscommunication re banks’ liquidity
  6. Brexit uncertainty

The market has now priced in zero earnings growth for the S&P500 for 2019 and market optimism among the general public has evaporated. Most economists, led by top ranked Ed Hyman at EvercoreISI are now using below 2% GDP growth for 2019, which suggests 5-6% earnings growth using 2011, 2012, and 2016 as a guidepost, when GDP growth was on average 1.7%, as he points out.

A resolution of any or all the issues listed above are needed as a catalyst for the markets to resume its uptrend in 2019. It is our belief that some these policy uncertainties are transient and may set up an interesting risk/rewards scenario for the coming year given that the current selloff was not induced by a worry about an imminent recession. Looking at each of the 7 selloffs without recessions since 1984, see chart below, all ended with the central bank easing and a favorable environment for stock returns. We are therefore not ready to call this a bear market for stocks.

S&P 500 Selloffs 1980 to Present | Source: EvercoreISI

S&P 500 Selloffs 1980 to Present | Source: EvercoreISI

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Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him at or by telephone at 212-888-6342.

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