A December to Forget

The worst December since 1931. As an active market participant, it is hard to remember much else about 2018. Not even the bombing of Pearl Harbor on December 7, 1941 produced as big of a sell-off in December as we experienced last year.

The question on everyone’s mind: Why? The economic backdrop is strong. The economy is certainly decelerating from strong growth to more moderate growth, but it is still growing. Employment is extremely strong, and by all appearance we had a splendid holiday in retail sales. Inflation is modest and it does not appear that a recession is on the horizon. In fact, in the economic data, there seems no sign of distress that we can discern.

We certainly worry about the Fed raising short-term rates, and the unwinding of its balance sheet via quantitative tightening. This may be the only, rational, real negative for the markets and the economy. We might throw the trade war in that bucket too, though its effect seems to be felt more abroad than domestically.

More so, we would highlight fear itself as the explanation. Our financial press seemed to feed us a daily dose of the fact the bull market was long in the tooth. Though, it conveniently ignored the lackluster or anemic pace and velocity of that recovery, as well as the quarters of negative GDP growth we had in 2011 or 2014. As it takes two consecutive quarters for a recession, not just one, we did not officially have a 2014 recession, (unless of course you were either working or invested in the energy business).

Never have we had such omnipresent daily coverage and noise of information and opinion regarding the markets. And remembering that sensationalism sells, the daily grind of news contains a lot of hype and fear-mongering. The headlines of a Government shutdown, the political divisiveness of our nation, the trade war, the “wall”, and rising interest rates seem to have created a cocktail of fear potent enough to yield the most atrocious December in memory.

The good news is that we have high hopes for 2019 as a result. The market correction has produced a very nice selection of opportunities and bargains in the equity markets for new cash or for redeploying funds in portfolios. Short-term cash and bonds now at least yield an inflation rate approximation and may even (gasp!) produce a real rate of return versus inflation, the first time since the Global Financial Crisis of 2008-2009.

We continue to be quite optimistic for very attractive returns for equity investors in 2019. We remain hopeful, and believe, that the December sell-off was an overdone bout of fear and emotion. In fact, as investors extremely focused on valuations, we are quite excited at the opportunity set with which we start 2019.