“The market can remain irrational longer than you can remain solvent.”
That iconic quote from the immortal John Maynard Keynes, father of Keynesian economics, is as relevant today as when he spoke the words in the 1930s. Traditionally, it’s a platitude attributed to negative sentiment in the market when, despite the favorable fundamentals for a reversal, stock prices remain low.
But it’s an outlook applicable to both ends of the spectrum, and as we continue to ride high, we often hear from clients that they don’t understand what’s going on in this market. Is it rational to continue to climb? It must be overdue for a correction, right? Yet, here we are, with the markets continuing to march upwards.
In Sharp’s recent Q4 Economic Update Webinar, we analyzed the market in all of its exuberance and examined external factors that played a role in shaping its past, present and future.
Decade in Review
As we embark on the third decade of the new millennium, we looked back at some of the events that influenced the U.S. economy and global markets:
- 2010 - Flash Crash
- The Dow Jones Industrial average plummets 998.5 points in 36 minutes
- 2011 - Occupy Movement
- Reaction to the great financial crisis and protest against inequality
- 2012 - ‘Exit’ Enters the Vernacular
- The original exit, Grexit, introduced by Greece’s potential to leave the EU
- 2013 - Gold Drops
- After flirting with $1,800/ounce, gold drops 33% and trades at $1,200/ounce
- 2016 – Presidential Election
- - Trump is elected, S&P 500 and gold drop 4% and 3% respectively overnight
- 2017 - Trump Tax Plan
- Cutting individual income tax rates, doubling the standard deduction, lowered corporate tax rate by 14%
- 2018 - Trade War
- The beginnings of the U.S.-China trade war, average global stock markets fell by 13.9%
- 2019 - Legal Pot
- Marijuana becomes a new asset class, meteorically rising and crashing in the year
Global Market Recap
Q4 2019 was an incredibly strong close to the year. There were solid returns across the board, with U.S, Europe and China all posting significant gains.
Looking at the VIX index – a key indicator looking at volatility moves in the market – Q3 2019 had a number of high volatility periods, with an average of 18.5 with spikes as high as 25. Comparatively, Q4 saw volatility drop significantly with an average is just under 14.
At the beginning of November, when we started hearing the news of an agreement between the U.S. and China, we saw the volatility, so prevalent in Q3, begin to drop. This correlation between the news and relaxing of volatility frames the importance of the trade relationship to the markets, more so than any other current external factor.
Sharp Economic Momentum Indicator
Designed to analyze 68 economic data points shared by the U.S. government and third-party institutions, Sharp’s Economic Momentum Indicator (SEMI) aggregates data and hierarchically weighs it to provide an understanding of U.S. economic momentum.
After hitting a high in mid-2018, the indicator dropped precipitously in mid-2019. We attributed the drop at the time to the FED hiking rates, which appears to have been correct. Strengthening that case, following the FED hiking cycle and the reintroduction of easing, the indicator leveled off and the downward trajectory ended. Currently, the trend is hovering and mildly positive, which we predict will continue in the short term.
GDP and Unemployment
- S. Q4 2019 GDP: +2.4%
- Sharp estimate for 2020 GDP: +2.1%
- Consumer Price Index averaged +1.8%
- The FED prefers this figure to be closer to 2%, and missing that mark raises concerns of a deflationary situation that could lead to lack of wage growth and price increases being stymied
- Extremely positive unemployment rate of 3.7% in 2019.
- 179,000 jobs per month in 2019
- If economy should generate 100,000 jobs to remain in stasis, so 179,000 is excellent
- 179,000 jobs per month in 2019
We saw the FOMC “course correct” in 2019. The FED, in many analysts’ eyes, hiked too much in 2018 (by 75-100 basis points). In 2019, much of that was reversed and looking ahead to 2020 we predict an overall lull without much hiking or easing for the foreseeable future. But if there is a risk, we believe that it will be another wave down in easing, not hiking.
The usual suspects, including the aforementioned U.S.-China trade war, are in play as geopolitical factors to the economy. Brexit, Iranian concerns, the impeachment process, concerns regarding Syria, Iraq and Iran are all in play. The 2019 novel coronavirus and its potential to spread within and outside of China is something we’re keeping a close eye on.
Central banks across the world are taking a pause and hitting a lull. We've experienced the crucible of fire over the last couple of years of trying to hike and stabilize. Central Bank policy seems to have been at this exact moment in sort of a very balanced situation.
Despite direct military action against Iran, involving the Saudis (and potentially even the Israelis), crude oil prices are remarkably calm – averaging $58 dollars a barrel on average across the year. The energy change that has occurred in the last decade, particularly the U.S. commitment to fracking and shale oil, has resulted in a tectonic change in the structure of the global energy market.
Adapt or Die
“When the facts change, I change my mind. What do you do, sir?”
We conclude our Q4 Economic Update recap by returning to our old friend Keynes and more of his words of wisdom. This quote sums up the benefit of our tactical and quantitative approach at The Sharp Financial Group: we believe in our core thesis, but we also know the facts change very quickly. Possessing the ability to adjust is one of our key value propositions, and what separates Sharp from the pack.
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