“Risk happens fast”, is a popular saying in the financial business which deals with downside market risk. It means that it may take years for a stock market to rally but it takes days or weeks for a stock market to correct. In a market selloff the herd mentality sets in as investors all head to the exit causing a short-term panic. The last quarter of 2018 has proven to be a prime example of this in the US (United States) markets. The S&P 500 stock index in the US was one of the few stock markets with positive returns for 2018 at the end of the third quarter (September 30, 2018). Within three months the S&P 500’s sharp decline produced the worst negative one-year return in the last ten years. It appears that the main trigger to the selloff was comments made by Jerome Powell, Chairman of the Federal Reserve Board (FED) in the US at the end of September 2018. Mr. Powell hinted at 3 to 4 possible interest rate increase in 2019 along with continued bond selling by the FED. These comments triggered rumors of a possible FED induced recession in the US by late 2019. Since those comments the FED has raised interest rates another quarter point (0.25%) but have reduced the proposed 2019 interest rate increase to only two. There is a lot of investor pressure on the FED to actually go to the sidelines concerning interest rate increases, allowing the economy time to absorb the past two years of interest rate increases and bond sales. The FED is very sensitive to economic data and any weakness should force them to at least a neutral interest rate stance. There is a feeling among investors that it is too late, and that the US economy is slowing, and a recession is on the horizon. This position is still in the minority, and upcoming corporate earnings and economic numbers will be closely watched by investors. Globally most economies have been underperforming the US, the same with their stock markets. The Chinese/US trade tariffs have been a factor in current weakness but in my opinion to a lesser degree that the FED mandate. In summary, 2018 has ended up being a very disappointing year because of fourth quarter weakness. Most stock market selloffs tend to be months not years and that is how I see the current market weakness we are experiencing. As we go through 2019, I expect things to improve economically and expect 2019 to be a positive year for stock markets. We have a conservative bias to our investments strategy which helps counter the increase in market volatility in the last quarter of 2018 and which should continue well into 2019.
