2018 was a pretty rough year for investors. Australian stocks ended the year 6.9% lower, their worst calendar year since 2011. In the US, the S&P500 finished 2018 down 6.2% – the worst year for a decade.
But after a sharp pre-Christmas sell-off – that led to worries of a bear market – we had a much-anticipated Santa Rally which limited the damage for the year. Between Christmas and New Year, US shares surged 6.6% and Australian shares were up 2.8%.
As investors enter 2019, they must now be wondering whether this Santa Rally represents a bottoming in markets.
It’s too early to say. But as we begin the New Year, it’s probably a good time to review why I think that the current sell-off is still likely to be part of a ‘’gummy’’ bear market (like 2011), rather than a “deep grizzly” bear market like the one we saw during the global financial crisis (GFC).
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To recap, a gummy bear market typically has falls of around 20%, but then the market rebounds over the next 12 months. That is what we witnessed in 2015-2016 for Australian and global shares.
A grizzly bear market, by contrast, sees top-to-bottom falls of 20%, followed by a further 20% or so falls over the next 12 months. It’s what we saw in 1973-74, the tech wreck and the GFC.
The main difference between gummies and grizzlies is the latter is typically associated with recessions.
I still don’t believe a US, global or Australian recession is imminent for a number of reasons:
So how is a ‘gummy’ bear market likely to play out in 2019?
After the Santa Rally, we could see more downside early this year.
Those falls would shift the current sell-off from a normal correction into a gummy bear.
Those lows would coincide with concerns around global growth. But those concerns are likely to trigger more stimulus in China and from the European Central Bank. (The People’s Bank of China has already announced more targeted easing and China’s annual Economic Work Conference signalled more fiscal and monetary stimulus in 2019.)
At the same time, the US Fed is likely to have paused its rate hikes. The recent sell-off was partly triggered by fears the Fed would raise rates too far and tip the US into recession. But in December we saw a ‘dovish’ shift at the Fed, with it softening expectations for future rate hikes. Our base case is that the Fed will hold the Fed Funds rate flat during the first half of this year and only raise rates once in the second-half.
Along with a Fed pause and global stimulus, the US and China should be making progress in resolving their trade tensions.
Ultimately shares should bottom around March.
Essentially this path is a repeat of what we saw in 2015-16 but in a tighter time frame.
As I outlined in my last Oliver’s Insights, there are a few things that investors should do the current uncertain environment.
After a difficult 2018, it’s understandable that investors are confused, even frightened, and looking for a respite from the sell-off. But we are likely to see volatility remain higher for a while yet.
But with no sign of a global recession, we should avoid a grizzly bear market and the correction/gummy bear should bottom in the first half. That will provide investors who are prepared with significant opportunities to buy assets at attractive prices. The key in the meantime is to remain patient and not panic.
Being prepared means understanding what is most important to you and having a plan in place that helps you achieve your goals and to live your best possible life. At Invest Blue we can help you to articulate your goals and set and implement a plan to help you achieve them.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.