In December last year, I wrote an article entitled “Nothing Terribly Wrong” talking about the market fears being overdone. At the time the ASX 200 was down 12% from the top. In hindsight, a marvellous thing, I wrote it ten days before the market bottomed. The markets have bounced. Let us revisit last year’s fears and see how they have developed.
Concerns about slowing US growth
This is a real issue although it appears to have been over-emphasised. The market, when it lost its head, turned some ‘less optimistic growth forecasts’ into fears for a US recession. Those fears are overdone. The US economy may not grow as fast as had been expected at the peak, but it is a shading in growth expectations rather than a collapse.
Employment remains at record highs, company results are still showing significant growth, and it is clear that if there are any signs of uncharted economic weakness both Trump and the Federal Reserve will step in. Trump in particular. He has a two-year runway to the next election and cannot afford to lose it because of the economy. Whatever it takes he will do it.
Concerns about a rise in interest rates
As we write the chances of a US interest rate rise by the end of this year, have dropped from close to 100% to zero with a 20.3% chance of a rate cut by December 2019 instead. The interest rate fears have gone away. Better than that, they have reversed.
The RBA has followed the US in getting more dovish and have recently downgraded their GDP forecasts leaving some brokers predicting a rate cut in Australia by the end of the year as well. Again, the central banks in the last month have backed off from interest rate rises with the bias moving back towards lower interest rates to stimulate growth and prices.
The fear of trade war escalation
This is a rolling issue that was interpreted as a significant market risk in the sell-off. There is now a thawing of trade relationships and a mutual willingness between the US and the Chinese to find a solution. This is largely why the US market, all markets, have recently recovered.
It appears that we are over the worst on trade talk sentiment, and although a settlement seems unlikely before the March 1 deadline, current thinking is that the “amnesty” on tariffs will be pushed out to June with the delay due to the complexity of any agreement rather than an unwillingness on either side to agree one. It looks like a deal will be done.
Concerns about peak earnings
This was the fear that the 20 to 25% earnings growth seen in the US last year, largely driven by Trump’s 2017 tax cuts, was going to drop back into the 5 to 10% range. We are already seeing that slowdown in earnings manifest itself in the current US results season, but it hasn’t disturbed the market.
According to IBES data from Refinitiv, analysts now expect first-quarter earnings for S&P 500 companies to fall 0.1% from a year earlier, not grow the 5.3% estimated at the start of the year. Yet share prices are still going up. Lower earnings expectations are already in the price.
Fear that the ten-year oversupply of cheap money is coming to an end
The unwinding of quantitative easing has been on the cards for years. The prospect of the Federal Reserve winding down their balance sheet was never a surprise, it was just another fear thrown on the pyre while the market burned. This fear has now dissipated. The most recent development has been thoughts that as the Federal Reserve starts to twitch about slowing growth, they will soon announce that they are going to temper the rate of balance sheet unwind rather than continue it. They say that you should “Never Fight the Fed”. It means that if things ever go badly for the financial markets, the Federal Reserve will come to the rescue. There are signs that they are prepared to do that again if financial markets start to stress about growth, about anything in fact.
The fear that US technology stocks were overpriced
One of the major market adjustments during the recent correction was the concern that the world is approaching a mobile device/smartphone technology peak just as the personal computer development and price cycle peaked and plateaued. The fear is that mobile devices and the software that’s on them will soon become a cheap commodity, that the market will be flooded with cheaper very similar products, that smart devices and software are going to fall in price, and on that basis earnings growth in US technology companies will be savagely downgraded leaving some of the share price rises in the major US index components looking exposed. That may very well be the case but the share prices have now adjusted to the worst expectations and if anything it has again been overdone. Apple fell 38% in the correction. It has now recovered 19% but is still 27% off the high. Facebook fell 43%. Netflix fell 45%. Amazon fell 36%. If the US market is going to continue to rally, then it is going to be driven again by the recovery in these large technology stocks. Most of them are still materially below their October prices. There is still room for recovery.
Now, can we please just get back to normal?
As all these fears begin to dissipate, the trade tariff issue, in particular, it looks like we have had a correction in a bull market rather than a long-term market peak, a sell-off rather than a “new” disaster or a “Big Top”.
Now, can we please just get back to normal? This gratuitous volatility is unwelcome, unnecessary and draining. Humans really shouldn’t be allowed to have a stock market if they are going to periodically lose their heads in a maelstrom of illogical short term fear. It wouldn’t happen on Vulcan.
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Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.
Whats a normal market ? There is always some perceived factor .
Marcus Padley one of the most reasoned commentators on the markets. Particularly liked the livewire interview recently on "The Problems with Buy and Hold". Gold!
Great article Marcus, but like many commentators, you seem to largely overlook one key feature. Investing, it has been said, is 80% psychology, 20% finance. The role of the 80% is now becoming abundantly clear. The emerging chaos is not about finance, it is about psychology. The US market dominates world share markets, and the USA is now led by a narcissistic, erratic, volatile and short sighted president, whose best idea is the one that popped into his mind 5 seconds ago. Initially narcissists are usually charming and persuasive (i.e. the DOW for the first 18 months after his election), but eventually the real traits emerge, and the narcissistic traits take over. Strap yourself in. This president and his erratic and destructive influence in unsettling world markets is not going to change any time soon.