January 2019 Comments: Observations on Stock & Bond Markets

Victor Levinson Comments

Once again, for some time perspective, we are using the chart below from our Special Comments to set out a few price points for the S&P 500 index since Donald Trump’s 2016 election (point and percentage increases calculated from November 9, 2016).  Other charts providing long-term context appear on pages 6-9.

Day After Election, November 2016, Base Level: 2,163;
Year End 2017: 2,674; +511; +23.6%
Summer 2018 Highs 2,930; +767;  +35.5%
November 23, 2018 Lows; 2,632; +469;  +21.7%
Nov 30-Dec 1, 2018 Recent Highs; 2,790;   +627 +29.0%  +29,0% +29.0++%29.0%
December 24, 2018 Recent Lows;        2,351; +188;    +6.7%
Year End 2018,        2,507; +344;   +15.9%
January 31, 2019        2,704; +541;  +25.0%

A few comments from these figures:

  • The December 24th low was 19.8% below the September (“Summer” in the chart above) 2018 all-time high, just less than the 20% that constitutes a “bear” market;
  • The recovery from the December 24th low to the end of January has been substantial, approximately 16%;
  • As for the somewhat longer view, the index is back to 25% higher for the two plus years since the election, well below the level reached in September, but not so far from the November 30th – December 1st

When stock prices stage such a rapid “U-turn” recovery, the normal instinct is to look for underlying reasons. For January, the financial media has focused on favorable corporate earnings, the Federal Reserve’s comments about holding off on raising interest rates, and progress on trade negotiations with China. Ignored in the explanations for this rally appear to be the US government shutdown and the ongoing negative issues surrounding the president, as well as the drumbeat of expert commentary that a recession is coming, somewhere in the world.  Note that corporate earnings reports are continuing, so the Price/Earnings (PE) ratio of the S&P 500 is in flux right now. The PE ratio gives us an idea of how reasonable stock valuations are in a particular time frame.

At Park Piedmont, we do not try to divine the reasons for short-term price movements, either up or down. Whether the events that created the 2018 September to December bear market for stocks have somehow dissipated to the point of providing solid ground for the January rally, or whether stocks are simply gyrating in a broad range to accommodate those who trade the short-term price movements of stocks, we simply do not know. We believe only the unknowable future will provide answers. Of course, this simply leads us to repeat our normal advice: try to ignore the short-term price fluctuations, develop and maintain an appropriate asset allocation for your particular needs, and hope that the historically favorable long-term results of the financial markets work in your favor.

Turning to bonds, returns were positive again in January, as interest rates on the ten-year US Treasury declined for a third consecutive month, this time to 2.63%. Comments from various Federal Reserve officials that their program of raising interest rates every three months would likely be put on hold for a while seemed to be a catalyst for driving interest rates lower and bond prices higher. It is worth noting that the full year 2018 saw four quarter-point rate increases (100 bps) from the Fed on the ultrashort rates it controls. By contrast, the ten-year US Treasury yield, set by buyers and sellers of bonds in the marketplace, increased only from 2.41% to 2.69%, an increase of 28 bps. When the ten-year rate gets close to the short-term rate, some market observers believe that is a signal for an economic slowdown.

The opposite view is that stronger economic growth is likely to continue, and with it the threat of rising inflation, which the Fed tries to limit with its interest rate policies. The debate about future rates of growth will surely continue, but for now, the allocation to bonds in investor portfolios continues to provide positive returns.