“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:
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
Monetary policy
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.
Geopolitical Headwinds
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.
Energy
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.
Disclosures
Sharp Wealth Advisory, LLC d/b/a The Sharp Financial Group (“Sharp Financial”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sharp Wealth Advisory and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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