BALL OF CONFUSION (Finding A Bottom)

January 16, 2019 | Vito Finucci


What happened in 2018? What made money? What are the three things holding the market back? What part of the business cycle are we in?

vito finucci rbc london ontario



“… Ball of Confusion, that’s what the World is today.

Eve of destruction, tax deduction, city inspectors, bill collectors.

Evolution, revolution, gun control, the second of soul.

Shootin’ rockets to the moon, kids growin’ up too soon.

Politicians say more taxes will solve everything… and the band played on.

So round and around and around we go. 

Where the World’s headed, nobody knows.”

                -Ball of Confusion - The Temptations (1970)



After ten years, the longest bull market in history is on life-support. What started as a tough October, with a recovery in November, since December, has turned into a major sell-off.

Of course, no downturn has a single cause but the Federal Reserve bears the brunt of the criticism at the juncture as it raised rates yet again, but still insists on ore rate hikes in 2019. Markets reacted swiftly and negatively.

The numbers are remarkable. In just 13 trading sessions, the S&P 500 had lost 14%. Over 400 of the 500 names are trading below their 200 day moving average, and on one day the week before Christmas, new lows beat new highs 175-0.

In fact, it was the worst December on markets since the Great Depression (1930). The means worse than two weeks after Pearl Harbour in 1941, worse than during World War II (1942, 1943 and 1944), worse than during the Vietnam war in the early 1970’s, worse than a couple months after the crash of 1987, worse than two months after 9-11, worse than in the midst of the Great Recession in 2008 when it looks like every bank on the earth could go broke, and many other examples I could mention. None of this makes any sense.

The S&P 500 is now down over 3-, 6- and 12-months, a backdrop that has accompanied just two of 76 rate increases since 1980. It’s also the first time in 19 cycles, that the US market is down Nov-Dec in a US mid-term election year.

Something is awry here. Ball of Confusion indeed.

There is a long list of reasons for the sell-off. Among them:

  • Fed tightening interest rates too quickly
  • Fed removing QE too quickly
  • US Government shutdown
  • Flattening yield curve
  • Slowing China growth
  • ETF/Passive Fund selling
  • Weak energy prices
  • Tariff/Trade barriers
  • Brexit uncertainty
  • Italian budget crisis
  • Debt levels
  • US economy slowing

It wasn’t just a tough Q4 for markets. All of 2018 was tough. You know it has been a challenging year when close to 90% of all global asset classes generated negative returns. It is also the first year since 1972 in which no asset class returned at least 5% (source: Ned Davis Research).

In fact, cash went from the worst performing asset the last two years to the best performing asset. Cash has not been #1 for 19 years:

As tough as the US markets have been, some global markets were crushed, where since the highs of year, there are a number of countries who’ve been in bear markets for some time: Russia, Spain, Italy, South Korea were down 25%, China and Brazil down 30%, and Turkey more than 50%.

But in the terms of US mid-term election years. 2018 was “average” as you can see from these charts:

Financial markets seem to be having trouble digesting three main issues:

  1. Central bank tightening
  2. Trade wars
  3. Global growth slowdown

With respect to central banks, here’s how it looks:

In the USA, the Fed did zero for almost 8 years, then since the Presidential election, increased from zero to 2.50%.

But when compared to recent cycles and S&P drawdowns, something doesn’t look right.



S&P 500 Drawdown



















With respect to rate increases, the Fed has already reduced 2019 from four to two, and will be “data dependent”. Heck, I think there’s a chance they even cut again in 2019.

With respect to trade, discussions have already started between the USA and China. I think there will be a deal. They both need it.

Finally, while economic activity may be slowing, there are no strong indications that the global economy is about to fall off a cliff in the next 12 months.

So yes, we’ve had a brutal quarter. How have markets fared after similarly brutal quarters? :


What to do now?

The first and most important thing to do is not panic. It’s so important I’d put it at first and second thing to do. Remember Warren Buffett’s diction of “Be fearful when others are greedy and be greedy when others are fearful”. Right now, yeah, there’s a lot to fear. Not once in the seven cycles I’ve witnessed has selling paid off longer term.

Here’s how this bull market compares to recent ones:

Market tops generally occur after a prolonged period of confidence (and greed) and I’d say that has not been the consensus for years. It just did not “feel” like past cycle tops we’ve witnessed. There’s been some technical damage done the last 60 days, it going to take some time to repair, and no doubt volatility will continue, but I still believe we are in a secular bull market with some time to go.

See other blog posts

Our story

A special welcome to all new clients who have joined us

Thank you especially to clients who have mentioned our name to people they know.  As a sign of gratitude, four times a year we’ll randomly select a client who has introduced our services to a friend for special acknowledgement via a nice dinner at one of the finer restaurants in London.


Our winner this quarter!


We are very happy and proud of the clients we serve in our practice and we are always open to serve more clients just like you.  Should you be talking to someone who is unhappy with their current advisor, or would like a second opinion we would be grateful if you passed on our number 519-675-2011 or 1-800-265-5911.  Thanks for keeping us in mind.

RBC Dominion Securities Inc. will not be responsible for any contest entries that are lost, misdirected, illegible, stolen, incomplete or delayed for any reason. We are hereby released from all liability, losses, damages and expenses or claims related to the contest. We may contact you regarding our products and services based on the information you have provided on the contest entry form. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns. RBC Dominion Securities Inc. and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. © 2019 Royal Bank of Canada. All rights reserved.