The New Year is shaping up quite nicely. The market is up roughly 18% from the December lows, although not back to the all-time highs from early October. As I said in several emails, I think the market reaction to events late last year was overblown. Likewise, I think the January/February recovery is not telling us something new about the economy and corporate profits, but is instead shaking off the unfounded fears from December.
The other thing to remember about December is that many market participants (traders, portfolio managers and others) are not at their desks. Therefore trading volumes are lighter and dramatic market moves (both up and down) can be exaggerated. That is certainly one of the factors that I think contributed to the Christmas Eve selloff.
Political and other headline risks also seem to have eased:
- the Federal Reserve seems to be on a wait-and-see basis with respect to further interest rates increases;
- trade talks with China seem to be breaking in a positive way (although we aren’t out of the woods just yet);
- and the government shutdown is past and the likelihood of another seems somewhat remote.
While we don’t invest based on political motivations, political and headline risks increase volatility. An easing of such has helped to bring down volatility this year. We’ll see if that holds going forward.
Looking forward, I think the economy is in great shape. While it may not grow at the 3-4% rate of last year, most economist expect it to expand in the 2-3% range – slower than last year, but still growth. I think we will see the same with corporate profits – growth that is slower than last year, but growth none-the-less. And as I’ve said many times in the past, if corporate profits are growing, then the market should follow along.
Let me know if you have questions or would like to chat.
