We were hoping for Santa Claus and thus far all we have gotten is Scrooge. The market is simply in a foul mood and nothing seems to be shaking it.
Yesterday we got what we were all wanting and expecting when the Federal Reserve (Fed) raised rates a quarter of a percentage point and then lowered the forecast for future raises. Chairman Powell said several times in his remarks that the Fed would ultimately be driven by the data. If the economy actually slows, then they will alter course.
Mr. Market acted like a spoiled child who just got everything he wanted for Christmas but throws a fit anyway. Since this market downturn started in October there has been a litany of reasons given for it. The first was that our economy is growing so fast that interest rates must rise; the 10-year Treasury has gone from 3.2 percent to under 2.8 percent as of this morning. The second reason was the trade tensions with China; there is now a cease-fire, and negotiations are at least happening. The latest reason is global growth slowing; there is no doubt that this is actually occurring. Asia, in particular, is looking weak with Japan already reporting a negative quarter and China’s growth slowing.
The big question is, will this slowing global growth spill over to the U.S.? Of course we can’t really know, but here is something to consider: The U.S. economy remains consumer-driven. Consumer spending represents roughly 70 percent of our total economic activity. More consumers are working today than at any time in almost two generations. Wages are growing above the rate of inflation for the first time since the 1990s. The U.S. looks very capable of once again leading the world economically.
A glimpse into this was seen yesterday in Federal Express earnings. Federal Express’ revenue grew faster than expected overall. They saw good growth domestically, but painted a bleak picture for their European and Asian business. The market punished them. Lost in this knee-jerk reaction was the fact that the U.S. demand was strong enough for Fed Ex to beat on revenue even with its international business being down. I’m old enough to remember when the U.S. often led the world in this way.
The probability of the global economy being better than expected next year is high and growing, partially because the pessimism is exaggerated, and partially because they are not giving the U.S. consumers the respect he and she deserve. That bodes well for the future and may explain why emerging market stocks, which had been the worst place to be all year, have quietly begun to outperform.
It is always painful to see portfolio values drop. However, it is precisely in times like this that we must remind ourselves of our long-term (three- to five-year) goals and the prudent fundamentals that will help us achieve those goals. We invest from the bottom-up. There are many companies that remain strong and whose businesses are doing very well. Their stock has just gone on sale and in some cases represents great bargains. It is far easier to spot a bargain than it is to guess what the market as a whole will do.
We have to be risk-averse. Now is a time for looking for opportunities. To paraphrase Warren Buffett, a prudent investor is greedy when others are fearful and fearful when others are greedy. Our mindset should be one of seeking opportunity, but we also have to respect the market. It is not time to jump in with both feet, as no one really knows how long this selloff will continue.
So we are neither going to panic nor go hog wild. We are going to keep our heads about us while those around us lose theirs. If we do that consistently then the world just might be ours, as Mr. Kipling suggested all those years ago.
The market may be delivering a lump of coal, but Christmas morning will come nonetheless and all will be much cheerier in the real world.
Warm regards,
Chuck Osborne, CFA
Managing Director
