December 27, 2018

The major stock market averages lurched lower in early trading. The Dow is currently down 359 pts and the SPX is about 1.7% lower. The energy sector—down 2%--is the worst-performing. Most sectors are down more than 1% in early trading. The VIX Index—a common gauge of fear among traders—is back up around 33. European stock markets fell between 1.5% and 3% today. Asian markets were mixed overnight. The dollar is weaker today (and so far this month). WTI crude is trading back down around $45/barrel.

Volatility, despite what the VIX says, is at historic levels. Yesterday, the Dow had its best day on record, climbing 1,000 points. That came after it lost more than 600 points during a short session on Christmas Eve. And today, despite any real impactful news, the index was down 500 points in early trading. So don’t be surprised if the Dow screams higher by the close. This market is a whipsaw as it finds bottom.

The Conference Board’s Consumer Confidence Index fell below expectations this month. The index declined to 128 from 136 last month. This survey has documented a sharp rise in consumer optimism about the economy since mid-2016. And even after this month’s decline, the index is still at historically strong levels. But while the chart doesn’t cause alarm, Bloomberg economists think consumer confidence will see a “steeper drop in the new year, buffeted by stock market volatility, the government shutdown and ongoing political uncertainty.” The operative phrase there is political uncertainty. The actual economy is humming along quite nicely, but investors can be forgiven for wondering if the Trump Administration is out to get them.

Famed economist Mohamed El-Erian was interviewed on CNBC last Friday. “I’m stunned by all this talk of recession,” he said, referring to the financial news media’s coverage of the stock market correction. “The economy is solid.” But he warned that it is possible, given enough pessimistic talk, to scare the economy into recession. He also had a message directed to policy-makers (i.e. Jerome Powell, President Trump). “If we’re not careful—and this is a message to Washington—bad market technicals can become bad economics.”

Hedge fund manager James Paulsen says the economy and stock market needed to slow down in order to elongate the economic cycle (CNBC). He believes that if GDP growth, corporate earnings and stock prices had continued to grow at unsustainably high rates, the Fed would eventually have to step in and kill it with aggressive monetary tightening. But now, “We’re going to slow below 2% [GDP growth] over the next four quarters…and that might just be enough to put a pause on the Fed and the bond vigilantes.” So while above average volatility may stick with us a bit longer, he’s optimistic about 2019. “I think it’s time to lean back toward a more aggressive stance in your equity portfolio.”

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