2018 Year in review – Stock Markets
With the S&P 500 and the DJIA back to where they were nearly one year ago, the stock market is looking more and more credible by the week. Corporate valuations have almost returned back to Earth. I knew stocks were overvalued, since before the last stock market correction, which ended up being largely forgotten by late spring.
It turns out that the summer rally in the stock market was never really called for. In addition, mainstream economists are now saying what we’ve been saying for many months -that rosy economic indicators are pointing downward. We’re not talking about recession yet, but rather a period of economic slow-growth.
Actually, I’ve been warning about the over-valued stock markets for a little over a year now, as the specter of rising interest rates is just now being realized. I correctly predicted that interest rates would rise, which was in line with consensus predictions by most mainstream economists, as the Fed’s tightening continued. It’s not just interest rates that are affecting the markets, however. The skyrocketing amount of corporate debt (somewhere between $6-9 trillion USD, -exacerbated further by rising interest rates), and the wearing-off of one-time charge-offs due to tax changes are at play. Separately, trade implications from rising tariffs are starting to ripple through the markets.
With regard to corporate debt, we have seen unprecedented levels of it, mostly caused by the extended period of low interest rates, a favorable tax climate, and quite a bit of over-confidence.
Charge-offs allowed in the recent tax code changes allowed for huge increases in capital expenditures
Some good news in all of this is that this type of correction is actually healthy for markets. What we’ve become accustomed to in the last 5 years or so are piles of money going to nearly all sectors of the market without much reservation. What we have now is careful, or “smart” investors reevaluating companies based on their individual merits rather that some pervasive feel-good emotion that everything’s just going up up up.
How did I know the correction was coming?
- I knew because we’ve studied the debt cycle over and over and we determined that we’re in the end stages of the current debt cycle. Here’s an excellent video about that here.
- Because the way the trump tax law was written , there are both short and long term implications, and the short-term juicing of the economy caused a sugar high that was bound to wear off.
- Because the market had not yet priced-in the effects of rising interest rates, which although are historically still low, take a significant bite out of earnings statements when combined corporate debt in the trillions.
- Tariffs have affected businesses in ways that are just starting to play out- and will continue to play out- well into the future.
- Because smart money exited the market just before the recent correction.
Because I have other analytical tools that I would love to teach you about! Please come back and visit this blog regularly, as more frequent updates are coming. Also follow me on twitter @REconomix1 for the latest warnings, recommendations and articles of interest.
You can reach me at REconomix1@gmail.com for any questions, comments, concerns.