Bear market or correction? Here’s our view.
From U.S. and China trade talks, to negotiations surrounding the Government shutdown and the Fed releasing minutes from their December meeting, this week was packed with events investors need to keep an eye on. Read on to get our view on the outcome.
Patience Prevails, For Now – In many of Zacks Investment Management’s recent communications, we have emphasized our view that the current market action, while unpleasant, has the markings of a short-term market correction – not a bear market. We have urged patience for the long-term investor. Since Christmas Eve, the market has bounced sharply off the lows, climbing nearly 10% in the two weeks since.1
The Zacks View: Yet another reminder of the wisdom of remaining patient during turbulent times, and the benefits of resisting the urge to make drastic adjustments to an asset allocation designed for reaching long-term goals.
While these are the biggest investment stories of the week, looking back on 2018 there were key stories that shaped the markets, from escalating trade wars to rate hikes and cryptocurrencies. While 2018 may be over, there are key takeaways that show how these events could shape 2019.
Take a look back at some of the biggest stories of 2018, and what we believe they mean for 2019 and beyond, with our guide “2018 Investors’ Year in Review.”2
If you have $500,000 or more to invest, click on the link below to get your copy today.
The Status of U.S.-China Trade Talks – The United States and China wrapped up trade negotiations this week, and consensus was that while progress looks hopeful and was made, there are also major hurdles left to clear. Markets appear satisfied to see that at the very least, there is movement in the right direction. On the table are issues over Chinese tariffs, the forced transfer of technology from American businesses doing business in China, Chinese state subsidies to companies which create unfair competition, and increased purchases of American goods by the Chinese. Reports indicate that the latter two agenda items saw some meaningful progress, but that sticking points remain related to China’s state subsidies and technology transfers and patent rights.3 To date, we’ve already seen some signs of small victories and Chinese concession. China recently removed punitive tariffs on US-made cars and auto parts, and they also upped purchases of American soybeans. Also, just last week, China agreed to approve the import of five new varieties of GMO (genetically modified) crop seeds, which the U.S. – the world’s largest producer of GMO crops – has been working to achieve for years.4
The Zacks View: These small breakthroughs, along with encouraging rhetoric from both sides, have arguably offered the equity market a glimmer of hope that a breakthrough is near. At this stage, with economic and political pressure mounting on both sides of the table, there’s a strong case that both countries are eager to arrive at a deal. Time will tell, but we see a positive surprise on the horizon.
A Government Shutdown, with No Clear End in Sight – For lawmakers and the White House, it was been a busy week of political posturing and negotiations that went nowhere. President Trump delivered a prime-time speech Tuesday (which Democrats rebutted immediately afterward) and traveled to the U.S. border on Thursday to make his case for a wall, to which Democratic lawmakers have firmly held will not be part of the budget. It is very difficult to predict what will happen next, but political pressure will start to mount as hundreds of thousands of federal employees will start to live without paychecks. The White House has agreed to keep the IRS fully functional and Americans can expect to receive refund checks when the IRS starts accepting tax returns on January 28. On everyone’s radar: whether President Trump will declare a national emergency that may allow the administration to use Pentagon funds to pay for construction of a wall, which is likely to be met with immediate legal challenges.5
The Zacks View: Historically, government shutdowns have not meant much for stocks, as corporations are not likely to feel a meaningful impact to earnings and since the government spending that would apply to Q1 GDP is still likely to be spent retroactively once the government re-opens.
Can the Federal Reserve Get the Soft-Landing Right? The release of minutes from the Federal Reserve’s December meeting has given respite to the markets, as it became clearer that the Fed is taking into account how market volatility can play into the economic outlook, particularly if corporations start to hedge investment and growth plans. To be sure, the Fed faces the ultimate challenge: getting interest rates back up to the neutral rate or higher while not overtightening financial conditions to the point of triggering a recession. The Fed faces many competing forces, from a nearly inverted yield curve, to a Real Fed Funds Rate hovering at 0%, to a market highly sensitive to liquidity and borrowing conditions. Further complicating the Fed’s job are extraneous forces such as the trade war with China and the partial government shutdown. The upshot appeared to be that the Fed is factoring every chess piece, and comments from Jerome Powell – as well as comments from the December minutes – indicate a willingness to be flexible and responsive.5
The Zacks View: Based on the language from December minutes and based on Chairman Jerome Powell’s comments, it appears more likely that the Fed will pause rate increases in 2019, which in our view would be a nice positive for equity markets.
These may be the biggest investment stories of the week. But what were the biggest stories from 2018? And what do they mean for 2019?
2018 was an eventful year for investors. Now that it’s in the books, take a look back at some of the biggest stories of the year, and what we believe they mean for 2019 and beyond.
If you are an investor with a portfolio of $500,000 or more, download your free report of the year’s key events and trends, including our takeaways for investors, and find out how Zacks Investment Management can work for you in 2019.
2 ZIM may amend or rescind the “2018 Investors' Year In Review” guide for any reason and at ZIM’s discretion.
3 The Wall Street Journal, January 9, 2019. https://www.wsj.com/articles/u-s-and-china-make-progress-on-trade-but-major-hurdles-remain-11547049544?mod=djem10point
4 The Wall Street Journal, January 8, 2019. https://www.wsj.com/articles/u-s-china-negotiators-narrow-differences-on-trade-11546959523
5 The Wall Street Journal, January 9, 2019. https://www.wsj.com/articles/december-fed-minutes-show-officials-saw-limited-amount-of-additional-rate-increases-11547060636?mod=djem10point
6 ZIM may amend or rescind the “2018 Investors' Year In Review” guide for any reason and at ZIM’s discretion.
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