Market Commentary

Making Cents of the Markets

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It was a shortened holiday week in the US, with markets closed down south on Thanksgiving Thursday and a half trading day on Friday. Consumers are getting discounts this weekend during the “Black Friday” deals, and early indications are that they are spending more than ever, especially online. Before the discounts even really started, people spent $4.15 billion from Wednesday through 5 PM ET Thursday, an increase of 29% year-over-year according to Adobe Analytics data. They project online sales to hit a new record of $3.7 billion, up from $2.9 billion spent last year. It seems the strong employment data along with (finally) rising wages is having an effect, setting up for a strong holiday season. Oil prices have also had their own Black Friday sales, now off about 34% from its peak back in early October. That should put a few extra dollars in consumers’ pockets this year. Stock markets, however, continue their short-term correction.

It is still our belief that this is likely a bull market correction, one that has repeated itself multiple times over the past decade (see the below charts). Recessionary risks, especially in the US, are still very low right now, and it certainly won’t be a consumer-led recession if we take any inference from the early holiday sales numbers. There is historical precedence for times like these, however, where low volatility leads to sharp, ‘punch in the face’ corrections. We all suffer the PTSD of recent bear markets, with the credit crisis of 2008 still fresh in our minds as well as the tech collapse in 2000. But prior to that, stocks were in a secular bull market from 1981 to 1999. Does that mean the chart was straight up with no pain?  Not at all but it was one of the greatest times be an investor in history during that very long term bull market. Sometimes a little pain could provide some gain!

Moving through the 1990s, there were several short, sharp corrections like the ones we have experienced this year. In August 1990, stocks dropped over 14% in about 3 months, only to recover over 29% 12 months later. In July 1996, in about a month markets dropped over 10%, only to surge 57.5% 12 months later. Twice in 1997, over 7% drop in March and 13% drop in October, the market was 45% and 28% higher 12 months later. And in 1998, there was a drawdown of over 14.5% before recovering 38% in 12 months.

In this latest bull market, investors have felt the sting of short, sharp corrections followed by recoveries. 2010, 2011, 2015 and 2016 all saw multi-month dips, typically 2-5 months down and 2-5 months to rebound. This current one, while seemingly sharper, is still in line with what is considered a normal bull market correction. It just feels more uncomfortable because it has been two and a half years since the last one.

Our Strategy

We are at major support levels in the S&P500 this week and last, and are currently going through a technical double bottom. Important levels are 2580 to 2650, and we are at the top end of that range so it is possible we drift a little lower before recovering. As mentioned above we do believe this is a bull market correction, versus a momentum shift into a bear market, but we are ready to raise additional cash if support is broken. Major news we are watching in the next few weeks are the G-20 summit starting on November 30, when China and the US are set to meet to discuss trade, and the upcoming Federal Reserve meeting on December 18-19 where we will get an indication of what their guidance is for 2019 interest rates. Oil prices have fallen substantially, likely to reduce inflation, which may cause them to slow their rate of increases.

The biggest risks in the coming year and beyond haven’t changed. The top 4 items we are watching closely are the trade war, a Fed policy error, rapidly rising interest rates, and slowing global growth.

The trade war is likely to persist between the US and China, with both positive and negative headlines in the next 12 months, likely to keep the market range bound. But, we are looking for some sort of progress and at least continued communication between the two countries. Fed often tightens conditions too far and contributes to economic detractions – we don’t think we are there yet, but worth monitoring. Wage inflation has started to show stronger signs, which could push the closely watched 10-year Treasury higher quickly – although they have gone the opposite way in the last few weeks with its’ yield dropping to just above 3.05%, from recent highs of 3.25%. Yield curve inversion remains a risk going into next year but we are not there yet. And lastly, slowing global growth, especially in China, and the normalization of US economic growth to about 2% by 2020 may cause some headaches down the road. One of these items may contribute to the next recession and bear market but the current evidence does not support that in the immediate future.

Charts of the Week

The first chart represents the previous secular bull market from 1981 to 2000, compared to the last 10 years (as shown in the second chart), with multiple short, sharp corrections on its way higher. Each line represents one month. Note the lack of corrections between 2016 and 2018.

Beyond the Markets

The world-famous and phenomenal Disney on Ice tour has made a stop in Vancouver and is here until November 25; bringing together fans of all ages and spreading festive cheer! The Dare to Dream show is taking place at the Pacific Coliseum and will feature Mickey and Minnie Mouse as hosts, as well as characters from Disney’s Moana, Beauty and the Beast, Frozen, Tangled, and Cinderella.

Listen to this week’s Making Cents of the Markets on CKNW here as we discussed recent volatility, how to navigate through these times and managing emotions and behaviours.

This commentary has been prepared by Pinkowski Wealth Management. It is for informational purposes only. Raymond James Ltd. believes this information to be reliable but does not guarantee its accuracy or completeness and is not responsible for any errors or omissions. Raymond James Ltd, member Canadian Investor Protection Fund. This email may provide links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.