foxex: Mind the Glitch

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. 2018 was but a 'Glitch'

Markets Close

Dow
23,346.24 +0.08%

S&P
2,510.03 +0.13%

Nasdaq
6,665.94 +0.46%

VIX
23.72 -6.69%

INV Anxiety Index
106.94 High Anxiety

US 10-Yr Yield
2.661 -0.93%

Welcome to 2019!

U.S. markets bounced back from session lows and closed higher for the day. The DJIA had a 500 point swing to close in positive territory, which is a sign that buyers are jumping on weakness.

The correction we experienced in the final three months of 2018 was 'just a glitch', according to President Trump, and the markets should go back to their winning ways once he signs a new trade deal with China. Feel free to ignore that market prediction no matter where your political allegiances lie.

Signs of a slowdown in the Chinese economy dominated headlines this morning and we think that will be a recurring theme throughout the year, even if the trade war is resolved.

Specifically, a private survey on China's manufacturing for the month of December showed a contraction in factory production. That may or may not have been impacted by the trade war but we'll never know since China keeps its cards close to its vest.

China's economy has been red hot for the past decade, but there are concerns that its 6-7% annual growth is not sustainable, irrespective of a trade war. China has emerged as the 'other' dominant economic super power of the 21st century, so a slowdown would be a major concern for global investors. It's an even bigger concern if the U.S. economy is also slowing down. Both are trending in this direction, which is one of the main sources of investor anxiety going into the new year.

This chart from Pantheon Macroeconomics paints the picture no one wants to see.

Why it Matters:

Now that the effects of the tax breaks passed in 2017 have been absorbed and spent by companies - mostly on share buybacks - we'll see just how strong the economy actually is this year. Remember, the stock market is essentially a bet on the future profitability of companies. The general consensus is that corporate profits may have peaked in 2018, and will decline throughout 2019. If the economy is robust, corporate profits should be as well. If they start to decline as expected, we can expect further declines for the stock market and talk of an upcoming recession will get louder.

Mark Kolakowski sums it up in this article:

Shrinking Profits may Hammer Stocks in 2019

What's Next:

Earnings season doesn't kick off for a few weeks, but until then we should expect to read preliminary announcements from companies adjusting their forecasts. We'll also read analyst reports wherein they adjust their earnings forecasts for the companies they cover. A steady drumbeat of declining forecasts will foretell a tough stock market going forward.

We got a taste of that today when Apple CEO Tim Cook sent a letter to investors warning them that revenue will come in below forecasts. The culprit: Lower sales of its new iPhones, specifically in China.

Earlier in the day, an analyst at Sun Trust Securities lowered his price target on Netflix, citing weaker than expected subscriber growth in the fourth quarter. Netflix will let everyone know if that analyst was right when it reports earnings on January 17th. NFLX closed 2018 up 30%. Chill.

Speaking of the FAANG stocks, since they were so influential in both the run up to market records in 2018 and the subsequent correction, we'll pay special attention to what they say.

Shoshanna Delventhal puts a fine point on it in this article:

Why the FAANGs are Crucial to a 2019 Rally

Final Point

While the correction we experienced over the past several months was painful and volatile, the broader market (S&P 500) never did enter a Bear Market. It came within 5 points of doing so, but the Santa Claus rally rescued us from falling into the den... for now. It could still happen. That said, a lot has been made of the 'massive' drop in stocks from October until the end of the year. It was a big drop, but nowhere near the truly massive declines we have experienced leading into past bear markets. JC Parets shared this chart from his excellent blog, and, as usual, he puts things in the proper perspective. Have a look and zoom in to see the specifics.

Looks more like a 'Dip', than a 'Glitch'.

Happy 2019!