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:
- Unresolved trade dispute with China
- Fed Tightening/Miscommunication
- Government shutdown over border wall
- Trump cabinet resignations
- Treasury miscommunication re banks’ liquidity
- 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.
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