“If political tensions and interest rate fears continue to subdue in the early months of 2019, I expect the Grim Reaper outlook to be replaced with a Goldilocks one”.

Derrick Lahey, January 2019

For the second quarter in a row, “what a difference a quarter makes”!

In early January, the world’s most powerful global central bank, the US Federal Reserve, blinked. It pivoted to the sidelines proclaiming that it had achieved neutral interest rates ahead of forecast and that no further interest rate increases were contemplated for the foreseeable future. Suddenly all of the recession fears that were so prevalent at the end of last year went away. During the first quarter of 2019, markets rebounded and took back all of the lost ground that they gave up in Q4. This essentially puts markets back to where we were at the end of September when they hit all-time highs before all this doom and gloom talk started. It is almost as if we were all on the new rollercoaster at Canada’s Wonderland for the last 6 months, ending right back where we started but exhausted from the thrilling ride.

These mood swings can be difficult to navigate. As most know, I am a big believer in behavioral finance and market psychology where fear and greed are in every investment decision. When markets get back to prior highs after a severe dip, the emotions of “breaking even” come into play and this can pose a challenge to further advancements. There has to be sufficient fuel in reserve to provide the catalyst for additional upside. A trade deal with China and an orderly Brexit negotiation are 2 possible developments that could de-risk markets and possibly support higher valuations. And contrary to all of the earnings recession talk last fall, corporate earnings have been very good for the most part which provides momentum to higher markets.

Another catalyst which is very much tied to market sentiment is available cash levels (and borrowing capacity) in the system. At the moment, there is lots of cash and very little margin borrowing which reflects skepticism. To be sure, some of that cash will be going towards the long awaited initial public offerings (IPOs) in names like Uber and Pinterest and a host of other money-losing technology companies that are rushing to market before summer vacations. Their successful launches (or lack of such) will also help us judge sentiment.

A break to new highs would likely trigger a mass FOMO (fear of missing out) move. I still think that this bull market has room to run and the higher valuations that come towards the end of the cycle when optimism abounds is still in front of us. There is no widespread euphoria to be found these days. While we have had pockets of excess (cryptocurrencies and marijuana are a couple I have discussed), there continues to be a very healthy level of negativity and pessimism.

I have enclosed a market cartoon that I have kept for over 20 years and found it relevant as a portrayal of the market activity in the last 6 months.

As always, feel free to call at any time!

Derrick