2018 Q4 Market Commentary
Are we at a tipping point in the stock market? The economy?? Or Both??? Over the last 3 months, we have heard a number of negative headlines including but not limited to the following: Government Shutdown, Trade Wars/Tariffs, Rising Interest Rates, Flattening Yield Curve, Trump, Corporate Debt, Government Debt, Global Economy and of course…Recession.
This negativity took its toll on the market as the S&P 500 finished down -14.0% for the quarter while the Dow and NASDAQ did not fare well either as they posted quarterly losses of -11.8% and -17.5%, respectively. The carnage led to the worst annual return in the stock market in a decade. The volatility ratcheted up very quickly during the quarter with 400, 500 & 600 point moves in the Dow almost daily with most moves to the downside. Everyone seemed to be on one side of the boat and just when you thought it was about to tip, we got a headline on the day after Christmas – “Best holiday season in 6 years” – and just like that we saw the biggest point move EVER in the Dow to the upside. All of the sudden it seemed like everyone shifted back to the other side of the boat all at once.
There is clearly a market shift happening right now and the volatility is likely here to stay at least for a few more weeks into the New Year. What happens next is anyone’s guess as the market tries to find a bottom. We like to analyze these times and try to figure out what really is going on. We think it is pretty clear that the market is signaling that there is a slowing in the earnings growth rate – this does not necessarily mean a recession but it is more likely that we have seen peak earnings growth – not peak earnings. So this means that we aren’t likely to see 10%+ earnings growth in the S&P next year but maybe we will see 7-8% growth. This can have a big impact on the valuation of the stock market.
One year ago in the Q1 2018 letter we highlighted the markets valuation as being a little stretched and the need for continued growth to support the stretched valuations. As we close the year the market is telling you that the growth is not sufficient enough to support the valuations. The good news is, as markets usually do, it will likely overshoot to the downside which will suddenly create very attractive valuations on the stock market and likely set us up for the next leg higher in the coming years. In fact, as we close the year out, the S&P 500 trades at just 14.3x 2019 earnings estimates of $175.06 which is now well below the long-term average.
Information included herein does not constitute investment advice and should not be viewed as a current or past recommendation to buy or sell any securities or to adopt any investment strategy.
Investments entail significant risks and are suitable only for certain investors as part of an overall diversified investment strategy and only for investors able to withstand a total loss of investment. In addition, there can be no assurance that current investments will be realized as projected. Actual realized returns will depend on, among other factors, future operating results, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing and manner of sale, all of which may differ from the assumptions on which the information contained herein is based. It should not be assumed that any investments described herein were or will be profitable. Forward-looking statements involve known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples and should bear in mind that past performance is not necessarily indicative of future results. Neither Chesapeake Financial Advisors nor any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were originally made.
Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this document.
