Market Observations: Tandem Investment Advisors

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Financial Markets Review

If you blinked, you might have missed it. The constant daily drubbing to end 2018 is all but a distant memory. It has been well documented that the S&P 500 posted its worst December performance since the United States was in the midst of the Great Depression in 1931 – down 9.18%. The month to forget was quickly followed up by the month to remember, as the S&P 500 logged its best January since 1987 – up 7.87%.

You will recall that cash & cash equivalents were the only asset class to sport a positive return in 2018. At one time, Deutsche Bank reported that over 90% of the global asset classes they cover were down on the year. With a flip of the calendar, Deutsche Bank now reports that all major asset classes posted positive performance in local currency terms for the month of January. Just as 2018 was the worst year for global asset classes, January 2019 was the only month on record to have 100% of all major asset classes close higher.

So, what has changed from month to month? Truth be told, not all that much has changed since the end of November. It could easily be argued that the dramatic increase in January was just as unwarranted as the steep decline in December. For much of 2018, we wrote about the global economic slowdown and the performance divergence between global financial assets and our domestic equity markets. In addition, we focused much of our commentary on the inevitable corporate earnings growth deceleration in 2019 and the relative overvaluation of the market on most metrics other than earnings. The U.S. equity market began to price in all these concerns over the fourth quarter and in fact overshot the mark during the 3rd week of December. The S&P 500 has now made back everything it lost during that frightful third week and now here we stand. The market has discounted an economic and corporate earnings slowdown. Now, we are left with the $1,000,000 question – has the worst been discounted with growth to accelerate again or has this economic cycle finally exhausted itself? Only time will tell. But, for the first time in a long time, the U.S. equity market’s risk/return profile is much closer to being balanced than it has been over the past couple of years.

Earnings Update

We are now almost half way through 2018 4th quarter earnings season with 46% of the S&P 500 having reported. As expected, the 4th quarter results have slowed down a little from the previous three quarters, but they are still very strong. According to Factset, revenues are on track to grow 6.6%, while earnings are on pace to grow 12.4%. Although the results have been pretty good, there have been a rather significant number of companies pre-announcing disappointing results due to margin contraction on the back of higher costs, waning global demand and uncertainty surrounding global trade.

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