Outlook is Constructive

When it comes to the stock market, December proved to be anything but merry. It was the worst on record since the Great Depression. In our view, the investing environment was one that felt like death by a thousand cuts. While no one cut on its own was fatal, the compounding effect turned serious. An escalating trade skirmish, a Brexit standoff, slowing global growth and a slew of critical tweets about the Federal Reserve took their toll along with $12 trillion in global stock market value, the largest market cap loss since 2008.

Stocks have rebounded strongly over the last three weeks, regaining almost half of what they lost in the sharp meltdown in the fourth quarter of 2018. Greater stability in bond yields has certainly helped equity market sentiment. We think bond markets will likely remain relatively stable given that the Fed looks to be backing off from its rate-tightening campaign and a spike in economic activity seems unlikely. At the same time, news on the trade front appears to be improving, even if specifics about a deal remain scarce. Other geopolitical risks could persist, but outside of trade we doubt any of them will significantly affect global economic growth. A combination of greater bond market stability, a pause in the Fed’s rate hiking and some improvement around economic sentiment may help equity markets continue to recover.

Although the financial headlines have been pessimistic since October, overall economic and market fundamentals remain solid. Monetary and fiscal policy remain equity-friendly, the economy is still growing, companies are enjoying solid profit margins and corporate earnings are expanding. In other words, we see no real signs of a recession on the horizon. That said, though, we think the highs for the current bull market may have already been realized last year. We believe volatility is likely to remain relatively elevated, which means we could see another near-term selloff at any point. Overall, we think equity markets are topping out, but that process can take quite a while and there is still room for upside. To us, this suggests that 2019 will be a year where investment selectivity is critical.

We continue to believe the underlying fundamentals remain strong in America especially when one considers this year’s robust holiday retail sales, buoyant consumer confidence, incredibly low unemployment rate and rising level of workforce participation-all underscored by strong corporate balance sheets.

That said, we also know a strong environment can easily be undone by self-inflicted wounds. To this last point, the UK’s vote to exit the EU is a clear example of a decision whose true outcome and impact remains both ominous and uncertain. While the market’s comeuppance was inevitable, the swift and steep decline during what has historically been an uneventful month, re-awakened recollections of the financial crisis. In so doing, some are projecting a repeat of the catastrophic atmosphere that shook the financial markets to their core. By contrast, we believe 2008 was a once-in-a lifetime meltdown that would be hard to replicate given the structural changes now in place. In the meantime, the fears and volatility that have re-emerged create a fertile backdrop for bargain shopping. As you know, we play long ball at Grassi and do not get caught up in the drama that whipsaws the markets.

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