Key Points

  • Stocks have taken a beating over the past few months in what we’ve been describing as a rolling bear market, but we don’t see a repeat of 2008 likely developing.

  • U.S. economic growth continues, but at a slower pace; and we expect more slowing this year. The threat of recession has increased as a decline in confidence among consumers and businesses risks becoming a self-fulfilling prophecy, with the Fed and the trade war with China continuing to hold keys to the degree of slowing and the timing of the next recession.

  • Political problems aren’t only in the U.S. as developments around the world could impact market performance.

“I have learned that peace is not the absence of trial, trouble, or torment but the presence of calm in the midst of them.”
- Don Meyer

Happy New Year?

Few investors were sorry to see 2018 go—with the worst December for stocks since the Great Depression wrapping up a tough year, although marginally salvaged by a decent final week. But the S&P 500 did end the year in the red for the first time since the end of the global financial crisis. Will the New Year bring in a different path? Almost certainly—years don’t tend to repeat themselves and although past performance is certainly no guarantee of future results, history is somewhat in the bulls’ favor, with the S&P 500 declining in back-to-back years four times since 1929. Uncertainty on the monetary, fiscal, and trade fronts have all contributed to the recent decline, which helped feed growing recession fears—with The Wall Street Journal reporting that Google searches for “recession” spiked in December. However, although recession fears among consumers have risen, the recent holiday shopping season looks like it was a robust one. Mastercard said it was the best season in six years, with a 5.1% year-over-year gain (CNBC).

In addition, the labor market remains strong, with the December nonfarm payrolls report showing 312k jobs created—well above the 176k consensus expectation, while the previous two months were revised higher by 58,000 jobs. However, the unemployment rate rose from 3.7% to 3.9%; importantly though for the “right” reason as 419k new workers entered the workforce (the labor force participation rate increased to 63.1%), but some are still looking for jobs—resulting in an uptick in the unemployment rate. In addition to the ample payroll gain, average hourly earnings (AHE) jumped 0.4% last month with the year-over-year rate moving from 3.0% to 3.2%. That gain is tied with October for the strongest wage gain since April 2009. The better data could help alleviate some of the concern that has crept in regarding the labor market courtesy of the uptick in initial unemployment claims—a leading indicator. That remains an area of focus, although some of the recent uptick was partly tied to weather/hurricanes.