Friday, 11th of January 2019
It is the first Newsletter of the year and first, we would like to wish all our readers a very happy, healthy and successful new year!
Finally, the day after Christmas, Santa woke up and brought this long-awaited respite in the brutal correction that happened during the bigger part of December. To put that in context, US equities had their worst December since 1931! It was a bloodbath and no sector or risky asset was spared. Oil had its biggest losing streak in 10 years, and the Japanese currency even had a mini flash crash, losing about 4% in a few minutes, before recovering. In 2018, all Equity indices finished in the red, with one notable exception (Brazil). The MSCI World AC, lost 9%, while the MSCI EM lost 14.50%. and of course, Europe itself was the hardest hit with the DAX losing more than 18%!
However, since 26th of December, all markets have rallied and are up already more than 10% off the lows, while oil is up by more than 23% since the lows of December. These are truly exceptional moves, as we had the biggest swing in points on record for the Dow Jones, as well as the biggest jump in points ever, in the last days of December. Then, last Friday, we had evidence that the descent in December was more a market event than a fundamental event, with the release of the Blowout Jobs number in the US, which came in at double the expectation! This allayed fears that economic growth in the US was coming to an end. Stocks rallied powerfully, and then Powell added some more fuel to the rally, by stating that the Fed was no longer on a pre-course to raising interest rates and that the future looked less clear cut regarding their policy. The Fed Minutes communiqué stated that “With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier”. This statement contributed to make the Nasdaq finish the day up nearly 5%, another very rare occurrence. Since then, and now a whole week after, equities around the world have continued to rally every day this week.
The one place where equities had a good year was Brazil. The Bovespa started to stabilize after the summer on hopes that Bolsonaro would be elected and would be much more market friendly. He ended up with a convincing election victory and his choice of Paulo Guedes as new finance minister was widely applauded by the financial community. The Bovespa continued to go up, as did the Brazilian currency, and we strongly believe in the change that is coming. It is a fundamental change of paradigm, which should turn the situation in Brazil from its lousy state of the past few years. Things won’t happen in a few weeks, but let’s not forget that the Trump election also unleashed a big economic and financial change that led US equities to rally for 2 years before seeing its first meaningful correction. As of yesterday, and only after 7 trading days since the presidential inauguration, the Bovespa hit a new record high and it is already up 6.7% year to date.
Next week is earnings season again and this could be the most interesting quarter in a long time. It could be a period when the stock market is put to the test, as companies discuss trade, slowing global growth and other issues that have shaken investor confidence. There have been some high-profile warnings, such as Apple, Constellation, FedEx and Lennar. Analysts expect that most of the bad news is out on earnings, but if the results and comments are worse than expected, the market could easily retest its lows. On the other hand, if earnings are better than expected, they could act as a positive force to help fend off further declines, strategists said.
We also agree with the opinion of JP Morgan’s Jamie Dimon. He said that “Markets from equities to high-yield bonds that have been flashing warning signs are probably an overreaction to slowing growth rather than a precursor of imminent recession.” Dimon added in a Fox Business interview released on Tuesday “I think markets are overreacting to short-term sentiment around a whole bunch of complex issues”. He quickly added that the market moves were a “rational response” to slower growth and the U.S.-China trade dispute. But overall, Dimon, who leads the biggest U.S. lender, said the December stock declines and the halting by banks of high-yield debt issuance last month were unwarranted. He said he’s “really not worried about” what happened to riskier corporate debt because credit spreads are returning to normal after a long period of suppression.
Demon was not alone holding that view. Ben Bernanke, the Fed Chairman who oversaw the worst crisis in 2008, said that “I don’t think this is way out of the range of relatively normal behaviour — we have uncertainty about trade, we’ve got uncertainty about the global economy, we’ve got uncertainty about the near-term path of the U.S. economy,” Bernanke said Saturday during a panel discussion with former Treasury Secretaries Henry Paulson and Timothy Geithner. “Markets absorb that uncertainty and reflect that” and he added that “Having our experience 10 years ago, we’re certainly not seeing those kinds of risks”.
To be fair, the world is still a complicated place. Trade tensions between US and China are still ongoing and not resolved, China has seen its economic growth slow quite a bit in the past few weeks and months. In Europe, the Brexit saga continues and is starting to have a biting effect on the UK economy, while France is overwhelmed with the “gilets jaunes” protests. This is certainly going to have a negative impact on the economic numbers and on GDP growth there.
So, we will probably witness a slowdown in world GDP growth, but no recession for the months to come. The US engine is still very powerful, while EM countries are seeing their economies back in expansion mode. Even China should continue to add liquidity and reflate its economy and we expect it to come to an agreement with the US concerning tariffs.
Last but not least, Interest rates around the world will stay low for a very long time. In the US, long term rates at 2.7% are not a problem. And in Europe, Switzerland and Japan, rates are low and negative and will stay there for a long time still.
In these times of heightened fear and market turbulence, it is always good to remember this quote from Warren Buffett “Be fearful when others are greedy and greedy only when others are fearful.”
We wish you a very nice weekend.
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