In a holiday-shortened week, investors learned a nasty lesson: when the bear reveals his fangs, the results can be nasty. A bear market is defined as a 20 percent decline from an asset’s 52-week high. In this case, the bear mauled some of the recent market darlings, including: crude oil, which has lost 34 percent of its value from its October 3rd high before touching its lowest level in a year; Bitcoin, which dropped below $4,200 after rising above 19,000 a year ago; and the technology sector’s darlings, the FAANGs (Facebook, Apple, Amazon, Netflix and Google parent, Alphabet), which together erased about $1 trillion in market capitalization from their recent highs.
Of course, these were the same stocks that led the market to new highs and some still remain solidly in the black for the year:
FAANG YEAR TO DATE
Facebook: - 25.4%
Google (Alphabet): -2.2%
What’s behind the recent aversion to risk? There is growing concern that the U.S. economy is unlikely to maintain its current growth trajectory. Yes, 2018 will likely see the strongest GDP (estimated at 3 to 3.2 percent for the calendar year) since 2005, when it was 3.5 percent. But 2019 is not expected to be as strong, according to Diane Swonk, Chief Economist at Grant Thornton. She credits corporate tax cuts and government spending as the catalysts behind this year’s shining economy.
But Swonk believes that “the corrosive impact” of tariffs, which are likely to push up consumer prices, combined with the diminishing effect of fiscal stimulus will mean that growth will slow down in 2019, leading to a recession in 2020. Adding to the slow down is the fact that the Federal Reserve will almost certainly raise interest rates at its December meeting and Swonk believes may have to raise four more times in 2019. She notes that “almost 20 percent of importers will pass on tariffs to consumers,” which will force the central bank’s hand as it tries to keep a lid on inflation.
No conversation about the wall of worry that investors face would be complete without noting the following concerns: a further escalation of U.S.-China trade disputes; a rocky and/or prolonged Brexit; and an abundance of debt among corporations, all of which have put investors on high alert for the last five weeks of the year. For now, the NASDAQ Composite, the S&P 500 and the Russell 2000 are all in correction territory, and the Dow is just 140 points above its correction level.