Two weeks ago, in the Capital Ideas article “A lower high and icicles,” I wrote that “…we’re still in a cyclical bear market until proven otherwise. If we can break the S&P 500 above the 2,740 level, its 40-week moving average, I’ll feel more comfortable [that the stock market’s rally is sustainable].”
There is a soon-to-be-released documentary called “Playing with FIRE,” which is about the “financial independence, retire early” movement, advanced by the millennial generation. FIRE has gained momentum with coverage in Forbes, the New York Times and on NPR. There are about a hundred “high-traffic” bloggers detailing FIRE journeys, many of those being listed on Rockstar Finance.
In Davos, Switzerland, the world of snow and icicles, the World Economic Forum’s annual meeting was held last week. Quarterly, my firm publishes a survey and sends it to 4,000 local business owners for what is called the Berkshire Business Confidence Index, or BCI (which, coincidentally is going out this week). It’s a formal assessment of owner confidence and intentions. Davos’ WEF is an informal assessment of more than a thousand global leaders and business titans.
Last week I had the opportunity to present to the Ladies Business Group, a local organization of female business owners and decision-makers. The agenda was to discuss investments by way of sharing the mistakes made by myself and others, the lesson being that risk management is more than preparing a portfolio for rising interesting rates or positioning it from a prolonged trade war, or even reallocating assets during a bear market.
Despite hundreds of thousands of federal workers missing their paychecks, unless you’ve had to go through TSA lines at the airport, the odds are pretty good that the partial government shutdown has just been background noise up until now. And it may remain that way. However, it’s not hard to craft a darker scenario.
Ever have a designated “Bad Movie Night” with your friends? It’s been a while for me. One day per month, a member of the group would go to Blockbuster and find the absolute worst movie they could find. Overacting, campy plots, special effects with a budget that matched my third-grade allowance—think “Sharknado,” “Roadhouse” or “Plan 9 From Outer Space.” These movies were so bad, they were good. They were examples of “good bad” as opposed to “bad bad.”
On Dec. 19, I wrote Berkshire Money Management’s “2019 Outlook,” detailing why we are positioned the way we are now for the future. Our outlooks are not intended to be set in stone; they’re living documents. As information changes, we change our minds. In only 12 days, it seems as if it’s already time for an update.
Employment is strong; we can all agree on that—or can we? I suppose it depends on whom you ask. If you ask the average person, they’re going to say yes. If you ask someone in the mortgage industry, they might have to force a fake smile.
What You Need to Know in Sixty Seconds
1. A recession is coming, but it won’t start any sooner than 2020.
2. US GDP should increase solidly over 2% in 2019 as we continue to benefit from fiscal stimulus.
3. The weakness of the equity markets in Q4 2018 will continue into 1H of 2019.
4. The S&P 500 will return double-digits in 2019, challenging the highs of 2018.
5. The 10-year Treasury will move above 2018 highs, to about 3.3%.
6. The Fed will hike the federal funds rate twice in 2019.
7. Inflation, as measure be the CPI, will rise from its current 12-month change of 2.2% by about a half-percentage point.
The big story this week is….oh, wait, there are two big stories this week. One is a two-day meeting of the Federal Reserve. The scheduling of the meeting itself is nothing new and not typically, by itself, a big deal. But this one is because the right words could start a rally in stocks. Or, just as easily, could justify the slump.
This column is being written the day after Theresa May delayed the Brexit vote (that was December 10th), the same day the US stock markets experienced a roller-coaster ride where indices plunged to test recent lows of the year only to bounce back up and close in the positive. Given it was a rather crazy day, let’s inspect it for clues about what to expect in the months ahead.
• We are beginning to favor Value stocks a bit more than we have.
• For nearly a decade we’ve been overweight Growth stocks. We continue to prefer Growth on a long-term basis.
• We are not shifting portfolios totally to Value, just putting it in Neutral.
For a long time now I’ve been predicting a recession sometime around 2020-2022. On October 3rd of this year I posted an article I wrote on BerkshireMM.com titled “Checking My Homework” to challenge my own theory. In it, I wrote:
“The biggest flaw by economists, in my opinion, is that they try to track the entirety of a $19 trillion economy… the stock market turns down before the economy, but no one tries to improve on the methods to track expectations of the economy and to thus be more in line with where it’s going, as opposed to where it’s been. My way is a better mousetrap.”
The markets are pessimistic enough that contrarians like us expect a solid rally through year end.
Q4 of a mid-term year (now) and the first half of an election year (first half of 2019) are, on average, the best three quarters for the stock market. However, a flipped House majority softens that historical tailwind.
The sell-off in October had less to do with perceived election jitters and much more to do with real concerns about tariffs and tightening monetary policy.
There is, historically speaking, a one-in-four chance the market drops another ten(ish) percentage points.
There is, historically speaking, almost certainty that the market will surge after mid-term elections.
History aside, we think the most likely scenario is a bit more pain followed by a rally.
First, some housekeeping. For my much-less-lengthy and much-more-frequent commentary, connect with me, Allen Harris, on LinkedIn. For a long, long time I’ve been “predicting” a recession in 2020-2022, if only to have an anchor in my investment hypotheses. I am hoping I am wrong, but looking at it objectively if a recession were to happen then you could look back (i.e. now) and see how all the dots could have been connected. We’ve been favoring a slight tilt toward Growth stocks for a long time, but we can see a case building to consider a neutral position in the…