Remember Q4 2018? Markets had bounced off all-time highs, trade was looming large and pessimism was gaining the upper hand in many investor minds. An inverted yield curve, slowing manufacturing, potential that the Fed might not reduce rates enough or in time, and fear of creeping into employment numbers were all hot topics. During 3rd quarter 2019, echoes of 2018 4th quarter were looking strangely familiar.
Are these all behind us? I am sure that they will rise again in the investor mind and continue to be headline risk, however, the likelihood of a repeat of 2018 4th quarter is looking much less likely today.
What has changed in just a months’ time? Data coming in doesn’t support the same level of decline at this point. Looking at iShares MSCI ACW ETF, Ned Davis Research illustrates that 2018 and 2019 have deviated in similarity. There are four elements that are deviating and making the argument that 2019 is likely to end quite differently from 2018.
First, the price level of the ETF has not followed the same track (at least initially). Last year, the index peaked in May and then traded sideways for months before falling in the 4th quarter, with a low on Christmas Eve.
Second, market breadth was declining through all of 2018. The opposite has been happening in 2019. Breadth has been increasing. Declining breadth in 2018 resulted in a low at the beginning of 2019 with less than 20% of countries with rising 200-day moving averages. This has improved to over 69% of countries with rising 200-day moving averages.
Third, monetary policy domestically and internationally has been easing. In 2018, the trend was rising rates putting pressure on the ability of economic growth continuing. In one year 85% of the world’s central banks are cutting rates!
Last of all, with the surprising about-face in interest rate policy, the path of U.S Treasuries has been exactly opposite of 2018. Since early September, a possible bottom in rates has been taking shape. Time will tell if that is the ultimate bottom for a while.
Does this mean we are headed for a year-end rally? Earnings so far have been better than feared. On average, the final two months of a year have been seasonally strong. The headwinds are largely geo-political at this point with the Fed broadly expected to cut rates at the October 30th meeting. If we do not get any economic or political surprises, a year-end rally is increasingly possible. What a ride this year has been!
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