Market Uncertainty Ushers in 2019

As is often the case with equity markets, (and life in general) when it rains it pours. The uninterrupted stream of negative headlines, both political and economic, that have rained down on investors in recent months have triggered the deepest selloff in equity markets since 2011. The three largest industry sectors of the S&P 500 — large-cap tech, financials, and energy have all fared even worse than the broader market as we look to close out 2018 today. The painful reset that gripped markets in Q4, in particular, has left several former leaders severely hampered with little prospect for a meaningful reversal in the near term.

Former FAANG darlings Facebook (-38.9%), Amazon (-27.9%), Apple (-33.0%), Netflix (-39.4%), and Google/Alphabet (-18.5%) have traded sharply off their respective 52-week highs on elevated volume in the waning weeks of the year. The issues faced by consumer-facing tech companies, in particular, will likely remain a factor for 2019 and beyond. Concerns over user growth, metrics of user engagement, and user privacy all add up to trouble for the sector. As if to add additional weight to the outlook for the sector, investors are beginning to price in anticipation of regulatory scrutiny and oversight that the sector has long avoided.

Financials, Bank of America (-26.1%), Citigroup (-35.7%), Wells Fargo (-30.9%), Goldman Sachs (-40.7%), and JPMorgan Chase (-18.8%) have hardly done better. Institutional selling fueled by fears over elevated levels of corporate debt, the potential for additional tightening by the Fed, and anticipation of a cycle-end fast approaching have all worked in concert to move investors out of the sector.

The largest sector in the S&P 500, energy, has fared equally as poorly. Exxon Mobil is 23.6% off its 52-week high. Chevron is 18.8% lower, and ConocoPhillips is 23.1% lower. Selling here has been in part due to a familiar theme: fears over slowing growth both domestically, but also globally. Additionally, increased US shale oil production has added to concerns over supply – irrespective of OPEC’s attempts to curtail production.

This type of market performance (correction) feels unfamiliar given the 10-year run this bull market has had, but it is not entirely unexpected. However, given that I have been an active member of the financial community since January of 1982, when the Dow Industrials were trading in the 700’s, and I was a runner on the floor of the New York Stock Exchange, this type of market reset is not unfamiliar to me. As such, my sense is that eventually markets do find stability and regain constructive trend when the data is there to support it. That data, though not singular in predicting future price action, does provide for meaningful historical metrics of measures, in the process eliminating a degree of uncertainty that has hijacked market sentiment. Eliminating uncertainty normally leads to reduced volatility.


This New Year’s holiday-shortened trading week will see light volume and the potential for additional volatility. Without question, the most significant event on the economic calendar is the Fed Chair speech scheduled for Friday, 10:15 am. Importantly, we also receive the monthly employment report for December on Friday morning. Econoday consensus is calling for a gain of 180k jobs, an unemployment rate of 3.7%, and an uptick in the average hourly earnings data from 0.2% to 0.3%.

Our most recent economic data makes for a case of modest moderation in growth but does not speak to a pending recession, at least in 2019. The final GDP reading for Q3, released on December 21, was a healthy 3.4%, and consumer spending in the period on a Q/Q basis was a solid 3.5%. Durable Goods Orders for November were 0.8% — up from October’s revised –4.3%. After-tax corporate profits in Q3 rose to 6.1% from Q2’s 5.9%. Leading indicators for November were 0.2% versus the prior month’s revised -0.3%. The November employment report reflected solid gains. The unemployment rate stands at 3.7%, the labor force participation rate has finally leveled off at 62.9% after decades of sliding. Manufacturing employment has been a particularly encouraging narrative for the U.S. economy. Inflation by nearly any measure has remained in-check — all while the economy has continued to expand. Weekly unemployment claims continue to bounce along at multi-decade lows.

Last week’s price action should lead to a more constructive flight path for equities, due in part to relatively cheap valuations as we move into 2019, though volatility will remain elevated and price action will likely remain choppy. With all three major indices trading below their 50 and 200 DMA’s, last week we witnessed some of largest one-day swings in index price in history. Of particular significance was the reversal that materialized on Wednesday which was represented by a 1000 + point gain for the Dow industrials. Thursday was significantly more dramatic in that the Dow lost nearly 600 points before closing with a gain of 260 points – an intraday reversal following the previous day’s 1084 point gain.

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the US markets open plus media, charts and Sam Stovall’s analysis Subscribe
Flickr NYSE photo: In 30 Minutes Guides