December 2018 Market Update

The theme for 2018 is volatility. After an uninterrupted rise in 2017, 2018 is making up for the lack of volatility. The S&P 500 has now experienced two corrections of 10%+ and many are questioning whether the bull market is over. But is this justified?

The data continues to show an expanding economy, solid corporate profits, and reasonable valuations compared to fixed income. 2017 may have gotten too optimistic (and complacent), but now the market is getting too pessimistic about future growth. There is little chance of a recession in the next year.

The recent declines can be attributed to a variety of headwinds. Trade with China, the potential for a messy Brexit, Italy, France, political gridlock, take your pick. This weighs on sentiment. Headlines are great for traders but not so much for investors. Investors should be focused on fundamentals and taking advantage of opportunities (such as this!) when they present themselves.

The Economy

LEI

Leading economic indicators are at an all-time high. As the name implies, this index typically rolls over before a recession.

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ISM MANUFACTURING

ISM Manufacturing has been steady. The last reading of 59.3 was well in expansion territory.

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ISM SERVICES

ISM Non-Manufacturing (Services) is composed of about 70% of the economic activity in the US economy. The last monthly reading of 60.7 was one of the highest on record.

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fredgraph

The St. Louis Fed Financial Stress Index is still negative and well below levels that would signal potential underlying issues.

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fredgraph (1)

There was a lot of discussion surrounding the inversion of the 2-year and 5-year treasury yields. It’s worth noting I guess. But the most timely and reliable yield curves are still positive, although flattening. The above chart is the yield curve between 2’s and 10’s. It’s about as flat as it’s been during this current expansion. However, this yield curve was relatively flat throughout much of the mid to late 1990s. And stocks did very well.

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Disclosure: None.

Nothing on this article should be misconstrued as investment advice. Trading and investing is very risky, please consult your investment advisor before making any ...

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