Is the worst finally over for the stock market? I would love to be able to conclusively declare that the selling in the market is all done and there is no more short-term risk in the marketplace. However, I’m not a betting man, and data is my thing.
Thankfully, there has been some very positive improvements in the market conditions following the harrowing market losses through Christmas Eve 2018. Since that time, we have had several positive developments, just not to the extent that we can decisively say that we are out of danger.
The positives that we have seen are as follows:
- The Fed has publicly stated and reiterated that it is going to be “patient” about raising interest rates. This has removed some fear that the Fed would continue hiking in the absence of inflation pressure and a softening economic environment.
- The price of Oil has stopped dropping. In fact, since the closing price of $42.53 on December 24, 2018 to the closing price of $51.73 on January 10, 2018, West Texas Intermediate Crude prices have increased over 21%.1
- Market breadth has improved. In fact, we have had two days since December 24, 2018 of stock market advances in excess of 10:1 in advancing issues to declining issues according to Ned Davis Research.2
These developments are not quite enough alone to convince us that we are in the all-clear. There are a few things improving but not yet confirming the bottom is already in for this deep correction.
- The US needs to avoid the possible global recession. The jobs report released on January 4, 2018 showed that the US economy added 312,000 jobs in December, outpacing by a huge margin the 176,000 jobs economists had been expecting. More evidence is needed to confirm.3
- Analysts, and therefore investors, need to be more reasonable about earnings expectations for 4th quarter stocks. It seems that with the Apple warnings and Macy’s warnings, we are getting there but we really must wait and see what more data shows.
There are some issues that remain outstanding risks that cannot be underestimated.
- China and the US need to resolve their trade war. The talks are ongoing, but until there is real action taken, anything could happen.
- A Brexit resolution needs to take shape. This is one area where anything could happen at this time and European economics weakened in the 3rd quarter of 2018 and it is too early to tell if the 4th quarter will show a worsening or improving, but an unsettling of the eurozone would be a bad development.
It is true that the stock market is never without risk. That is what makes investments potentially profitable. The biggest concern is trying to decide where we are in our economic cycle and our most recent large correction. It always sounds so simple, but we all know it isn’t!
If the growing possibility of a global recession here in the USA could be avoided, and concerns about trade could be resolved, we could expect the stock market to rebound very nicely and potentially even see new highs in 2019!
The S&P 500 is currently right around a major resistance band of 2,581 to 2,630. If it can clear those numbers, this rally may be sustainable. If I could have my own personal wish-list it would be for a retest of the December lows without as much fear, great resolutions to the trade war and Brexit and a strong rebound from there with no looking back until we reach 2,950! The hardest thing that requires is patience and the willingness to adjust if we don’t get our wish-list.
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