In the spirit of the holiday season, this week I have a handful of stocking stuffers for you.
I assume you’ve been good this year, so no coal for you! Instead, here are five factors that I think will play a role in your financial performance for 2019…
Stuffer No. 1: Follow the Money.Specifically, follow stock buybacks. Since the 2009 low in the market, corporate buybacks have been a huge driver in pushing stocks higher. Buybacks in 2018 were huge, exceeding $1 trillion.
But here’s the thing: How much more stock can be bought back? Last week, more than two-thirds of the massive $34.4 billion in buybacks were concentrated in three companies. The second half of the year saw buybacks fall by 45%! Did companies blow their load from the tax cut benefits in the early part of the year?
It will be tough to grow buybacks with more difficult comparisons in 2019. Watch corporate activity closely.
Stuffer No. 2: Follow the Liquidity. After a decade of low interest rates and gimmicks like quantitative easing, the Federal Reserve is raising the federal funds target and reducing its balance sheet. It’s already raised from 0% to 2.50%, and its assets have come down by about 10%.
But, now, the Fed is allowing about $50 billion per month in maturing bonds to run off its balance sheet.
This is the first time in history that the central bank of the largest economy with the reserve currency is dramatically pulling back liquidity. Markets follow where the liquidity goes. If money is flowing into an asset class, it will go up. As liquidity dries up, look out below.
There’s no telling what impact this could have on stocks, but it’s clearly a change in direction over the prior nine years.
Stuffer No. 3: Follow the Trend. The trend is your friend… until the end, when it bends. It’s been very easy to make money buying stock indexes in recent years. There was a persistent grind higher.
Using the 200-day moving average to measure the trend has been a good guide. Since 1929, when the 200-day is rising, the market is up 7.7%. That happens about 69% of the time. The rest of the time, when that average is falling, the market is up just 1.2%.
Right now, the market has broken below the 200-day moving average. A lot of stocks are already in bear market territory. The bull market is getting long in the tooth. Individual stocks are starting to get spanked. Risks are increasing.
Stuffer No. 4: Follow the Correlations. Everything is moving together. That may make it harder to be defensive this time around when risk is higher than in the past. There might be nowhere to hide… except cash.
Cash gets a bad rap. It’s yielded nothing for a decade. But cash sleeps soft and sound at night.
Holding cash is now more attractive than in recent years. Risk-free CDs yield more than the dividend yield of the S&P 500 Index.
There will be asset classes that bottom out before major market indexes do too. So, it’ll be important to pay attention to what is becoming uncorrelated to U.S. stocks to figure out where buying opportunities are popping up.
My guess? Emerging markets have already been slaughtered. There are countries that will start to rally even if the U.S. finally falters.
Stuffer No. 5: Don’t Follow the Crowd. Despite a lot of stocks getting knocked on the chin, market sentiment is still too bullish. Short interest has changed little in the last two months despite weaker stock prices. Traders continue to hold massive amounts of leverage. Billions of dollars are still flowing into equity funds. Money is being pulled out of bear funds. Eight of the last 10 weeks have seen outflows in bear market funds.
Given the level of bullishness, caution is warranted. These trends need to reverse sharply before risk in the market is reduced.