Exhibit 2 shows the performance of various major U.S. market measurements for the year ending December 31, 2018.
According to the Reuters international news agency, investors massively pulled out $46 billion from U.S. mutual funds during the week ending December 19, 2018. The only larger mutual fund withdrawal occurred in October 2008. In some respects, this liquidation potentially sets up the makings of a short-term rally into early 2019.
What’s Worrying Markets?
1. The U.S. government appears to be in disarray, as investors are not feeling secure with the decision makers in Washington. 2. The Federal Reserve seems intent on doing its thing, which is to raise interest rates. 3. Changes in party leadership in the U.S. House of Representatives in 2019. 4. Global economies continue to deteriorate. 5. Fourth-quarter stock markets are not usually down. (Historically, when the S&P 500 Composite declines in December, the following year is difficult.)
What Did Go Up in the Fourth Quarter?
Long-term government bonds in the fourth quarter of 2018 were one of the investments that increased in value as interest rates on 10-year and 30-year U.S. Treasury Bonds declined. Exhibit 3 and Exhibit 4 shows the declining yield trend of these bond maturities since the beginning of October 2018.
For some time at Oxbow, we have maintained the view that we expect considerably lower interest rates in 2019 as many investors head for safety. In addition, we think inflation rates will be much lower, which should bode well for income-oriented investments. The money supply continues to tighten, mainly due to the Federal Reserve’s current monetary policy of taking money out of the banking system to the tune of $50 billion per month. Even if the Fed does not raise interest rates in 2019, the effect would be like having another two or three rate increases.
Past Oxbow Comments April 2018 – Market Comments:
“The 10% drop in February (the first of that magnitude in two years) was a ‘wake-up call’ signaling that the bull market was getting tired and has now entered a transition phase. ”
July 2018- Market Comments:
“With commodity prices down for the year and employee wages.fiat, at Oxbow we do not see inflation numbers moving much higher. Surprises in the next 12-18 months could be interest rates going lower.”
July 2018 – Market Comments:
“We have, in our opinion, a Federal Reserve board that is getting far too aggressive on raising interest rates. . . . The Federal Reserve still can’t seem to relate to Main Street.”
August 23, 2018 – Oxbow on Fox Business TV interview:
“The economy has peaked. It can only go so far.”
October 3, 2018 – Oxbow on Fox Business with Maria Bartiromo
TV interview (record Dow closing day): “Oxbow expects a market correction. Higher cash reserves are advised. Profit margins have peaked. ”
October 2018 – Market Comments:
“Historically reliable rate-of-change indicators on the stock market have turned down. Applying this measurement, we would look for potential market declines, which is why Oxbow has higher cash levels.”
October 2018 – Market Comments:
“We believe that the rate-of-change on interest rates has peaked. We would not be surprised to have rates moving lower by the end of the first quarter of 2019.”
What About the Future?
According to David Rosenberg, chief economist and strategist at Gluskin She.ff+ Associates, 14 million new people have entered the financial advisory business in one way or another within the last 10 years. This means they have never witnessed first-hand tough market conditions. In our opinion, this could tend to exacerbate market volatility. We understand that volatility can be bothersome, but it’s likely here to stay for a while. At Oxbow, we think that a recession sometime this year could be a real possibility. Earnings estimates for 2019 are beginning to slide lower, and Wall Street keeps whistling in the dark as if nothing is happening. Our largest holding in the Oxbow Income Strategy is still the U.S. Treasury bond. We believe that with interest rates lower in 2019 income-oriented investments will achieve favorable performance.
Cash in our investors’ portfolios currently is being maintained at a high level and can be expected to remain that way as we move into early 2019. It is our thinking that last year’s fourth quarter was not really a shadow but a trend. For the last five years, valuations have been increasing to high levels with very little fear of risk. Our proprietary, long-term, rate-of-change studies have historically helped us detect trends. They currently are flashing caution. What this means is there will be some good opportunities in the future-but not quite yet.
At this point, 2019 looks like a potentially rocky path for investing due to a host of uncertainties, both domestic and global. Looking ahead, “Headline News” will probably lead to more volatility. We assure you that we at Oxbow, as always, are
“staying tuned” and will remain alert to meaningful changes that occur within the investment landscape.
Ted Oakley, & Bob Walsh