2019 | Q4

Has the Panic Begun?

Aren’t you happy you didn’t listen to the negative reports of the 2019 media?

Aren’t you happy you didn’t listen to the negative reports of the 2019 media? 

One of the most celebrated investors of the 21st century Ray Dalio said this, “I believe we are now living in a world in which sensationalistic headlines are what many writers want above all else, even if the facts don’t square with the headlines. You can believe me, or you can believe the WSJ writer”.

We have just ended the best year for the US stock market since 1977. Our economy is the envy of the world with the unemployment rate at a 50-year low. In addition, we have historically low inflation and interest rates, strong wage growth, household income at a 20-year high, accelerating labor markets, soaring housing starts, excellent corporate profit growth, strong retail sales, 7+ million job openings, a strong FOMC economic projection for 2020 and 2021, and hopefully a US China trade deal to be signed shortly.

It is no wonder the panic has begun!

WHAT PANIC? One of my main concerns are the new bulls; many of whom have been on the sidelines for much of the past 10 years or so and are now throwing money into equities at a record pace. The panic I am speaking of is a buying panic. In only 3 months, what happened to the recession talk that dominated the headlines? What about the major full cost brokerage firms that disseminated sell recommendations for the 4th quarter of 2019? No wonder they are all announcing major layoffs. What about all the trade war talks around the globe? What about the Brexit fears? I could go on and on about how people’s emotions have changed so quickly. Since the 2008-09 meltdown, which of course was not without good reason, every pullback has proved to be a buying opportunity. Now with markets at an all-time high, there are still many who fear an end of the bull market must be near. Sooner or later they will be right, but keep in mind it should only be for the short-term. Corrections, some very painful, are a common occurrence in the stock market. The recent 2018 4th quarter selloff saw a 19.8% plunge and it was nerve racking; but those who choose to stay the course and avoid the pitfalls of timing the market have been rewarded. I would not be surprised to see a 10 or even 20 percent correction on any bad news due to the recent speculative buying.

Not to be redundant, but investor emotions of fear and greed lead to market timing which is much less likely to lead to successful achievement of one’s goals over the long-term. The missed opportunities of market timers have led to severe underperformance of most investors these past 10 years. Dismal results surrounding attempted market timing is not limited to the retail investor, in fact hedge funds are struggling through another less than stellar year. The hedge fund industry saw more closures than openings for the fifth straight year and the Bloomberg Equity Hedge Fund Index is up just 10% this year. This is why we stress smart hedging.


“Historically, it’s taken about two years for a change in U.S. interest rates to be fully reflected in U.S. GDP”, Trahan said. “With that logic, given that interest rates last hit their peak in late 2018 after the Fed’s fourth rate hike of that year, GDP should reach a bottom in late 2020. Most previous business cycles saw the S&P 500 hit a low and then start to recover 5-7 months before GDP bottomed”, he added, “based on a review of the ‘seven major Fed-induced slowdowns’ of the last five decades”.


Earnings growth will help lead the S&P 500 higher in 2020, but there are still some risks to the outlook, according to Citi’s chief U.S. equity strategist Tobias Levkovich. Citi’s “Panic/Euphoria Model” has moved back to a neutral level amid stocks’ recent rally after edging toward “panic” territory a few weeks prior, underscoring improving investor sentiment, Levkovich said in a slide deck report.

Goldman Sachs-3400 

“The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward,” Kostin said. “Both theory and history support the argument that lower interest rates should increase the value of equities, all else equal. More than 90% of the rally in the S&P 500 YTD has been driven by valuation expansion, as earnings growth expectations weakened but the market priced Fed cuts.”

Canaccord Genuity-3350 

Dwyer outlines reasons to be bullish on the S&P 500 next year: first, monetary policymakers globally have suggested “they will maintain a highly accommodative stance.” Second, the corporate credit market remains robust and bank lending standards have remained relatively easy, enabling borrowing for companies of various sizes and creditworthiness.


Stocks will stabilize and appreciate slightly in 2020 after more than a year’s worth of choppy equity trading, which had been driven by gyrating interest rates and an ongoing U.S.-China trade war, according to Jefferies.


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