False Sense Of Security In Equity Markets

While the economic data continue to point to a global economic slowing and possibly a recession, global stock markets (above chart is the All Country World Index ETF) have had a resounding start to 2019.

Why?

The meltdown of stock markets in December of 2018 not only put fear into investors who liquidated equity mutual funds in record numbers, but also into central bankers. The US Federal Reserve did a quick about-face in their interest rate policy commentary (from tightening of monetary policy to a neutral stance) in a heartbeat. Other central bankers around the world were quick to follow and it filled investors with a sense of hope, enough so that they bought back in to equity markets. However, the volumes of trade have been underwhelming, which is one reason to render caution. Although it appears on the surface to be a catalyst, central bank mandates do not include stock prices, only the levels of inflation/deflation and in the US, the level of employment (which at the moment hardly warrants easier monetary policy).

An eye-opening decline in US retail sales in December (released on  February 14th due to the US government shutdown) caused big revisions in US Q4 GDP:

In the current stock market mentality, this is looked upon as a positive, because it further removes any concerns that the US Federal Reserve will go back to raising interest rates.

But, the bond market, which historically leads all other financial markets, is now warning us of the slowing future economic situation (lower yields, higher prices):

Needless to say this has been great for our balanced portfolios that have seen an almost full retracement (depending on your allocations) of the damage imposed on portfolio values in the final quarter of 2018 (bond prices higher and stock prices higher).

History will tell us that this is not the normal correlation between stocks and bonds and that at some point this situation will re-adjust.

Expecting further deterioration in the global economic picture (per the bond markets) and no real easing (yet) from central banks (as it has just all been an aural soothing for stock market investors thus far: all talk and no action),  and if, as expected, the earnings picture continues to deteriorate (with a slowing economy), there will not be much for stock investors to be so confident about.

Volatility is not over, in fact we suspect that December was a preview of what is to come further down the road. Volatility will bring value, in time. Patience will reward those who are cautious.