2018 has been a painful one for equity investors with many indices entering a bear market, which is a fall of 20% or more from their peak. Many investors thought that U.S. equities have the potential to move against the global trend, but the final quarter of the year proved them wrong. The Nasdaq Composite and Russell 2000 both entered bear market territory last week, meanwhile the S&P 500 and Dow Jones Industrial Average are not far behind.
Most investors suddenly seem to be pessimistic believing that we are at the end of an economic cycle and a recession is ahead. However, neither U.S. economic data are reflecting such fears nor do corporate profits. So, the question many are asking about: Will markets start recovering from here or bears to remain in control?
From a valuation perspective, stocks are looking much cheaper from a three month ago, and if the U.S. economy continues to expand as projected by the Federal Reserve, buying the dips looks to be wise idea. If markets do not believe Fed Chair Powell in his assessment of the U.S. economy more investors will rush into the exit doors by selling risk assets.
This is a very tricky environment even for the most experienced investors. The Treasury Bond markets provided a negative signal about the health of the U.S. economy after the short end of the yield curve inverted, but economic data are still not confirming these gloomy signs. However, a continued selloff in equity markets and other risky assets will eventually impact businesses and consumer confidence leading to a substantial slowdown in economic growth.
As for the final trading week of 2018, there is a chance for Santa Clause to arrive and see a recovery in stocks given that markets are in an oversold territory, but this should not be taken granted heading into 2019 given the many unknowns that remain looming. Investors need to assess whether the recent sharp selloff and spike in volatility is just some noise or something far more worrying about the U.S. and global economy. Probably will get to find the answer in Q1 2019.
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