Investors have many differing opinions about what’s happening on Wall Street, but one thing everyone agrees on is that 2018 has been an eventful year – very eventful.
In the first half, many sectors of the economy enjoyed strong and consistent growth, unemployment fell to record lows, consumers were confident about the future, and the Dow Jones Industrials made new highs repeatedly. However, as 2018 progressed, those gains came apart.
The Cruelest Month
According to the poet, April is the cruelest month, but on Wall Street this title clearly belongs to December. In the three months from late September to late December, the Dow Jones Industrials were plunging with increasing ferocity. By December 24 they had dropped more than 5,000 points or over 20 percent, making this selloff an official bear market. The S&P 500 was equally disappointing; it fell from 2,930 to 2,351. December of 2018 was the worst on Wall Street since the Great Depression.
And the carnage was not limited to stocks. For example, the price of oil also went south. In early October, oil on the Merc was trading above $75/barrel; by late December it was below $43/barrel, a drop of some 45 percent. Some analysts said these sharp declines mean the market is anticipating a weakening economy.
Wall Street Gets The Willies
Wall Street had been so good for so long; what actually derailed the bull? Apparently there were two developments in particular that investors found very worrisome.
The first was the escalating trade war with China. The trade deficit with China is massive and has been worsening for years. Numerous U.S. factories across the country were forced to close because of cheap imports from China, leaving unemployment and poverty in their wake. Chinese companies that want to do business in the U.S. can do so easily. By comparison, U.S. companies trying to do business in China have to contend with many obstacles and barriers.
President Trump said all he wants is a level playing field, and the only way of achieving that was by imposing tariffs on Chinese goods. Nevertheless, China retaliated by placing tariffs on thousands of products made in America. Both countries have threatened to raise tariffs even more and to place them on more products.
So far, these moves have accomplished very little. In fact, all they did was to make ordinary consumers pay higher prices for many of the products they need, hurt profits at many companies, and hurt the growth the economy had been experiencing. With these unwelcome developments to contend with, and the real possibility that the trade war could escalate sharply, a growing number of investors have decided to take their profits and head for the exit.
The second and possibly more worrisome explanation for Wall Street’s woes was rising interest rates. Although the economy had been expanding steadily, budgets of both companies and consumers depended on interest rates remaining low and were balanced on a fine line. The Fed raised rates four times in 2018 – nine times in the last three years – and said there would be additional rate hikes in 2019. These proved to be too much and broke the back of the bull.
With so much happening so quickly on Wall Street, how might stocks do in 2019? This question is a very difficult one to answer, but keeping the following in mind may help.
In late summer/early fall there was a spike in selling by corporate insiders, and as has been pointed out here on various occasions, insider activity has been called the single best indicator of the market’s direction. Last fall, this observation again proved prescient because soon afterward the market plunged.
A Silver Lining?
Finally there’s some good news worried and battered investors will be happy to hear: Insiders recently shifted gears and are now buying shares in their companies aggressively. In fact, their buying is now outpacing their selling by the most in eight years, a very welcome statistic.
The last time insiders were buying so heavily was back in 2011, when the Dow fell by approximately the same percentage as it has declined since late September. Back then the market gained 10 percent in each of the following two quarters. In other words, while this is only one indicator and can’t be used by itself to make investment decisions, it is nevertheless reassuring.
Nevertheless, worries remain. Back on Oct. 13, 2008, the Dow Jones soared 936 points, at that time the largest one-day point gain in Wall Street history. Two weeks later, after giving back some gains, the Dow added 889 points in a single session, at the time the second-best one-day point gain ever. The market looked like it had turned a corner and begun a new bull market, but that was misleading. Actually, the steepest losses of that horrific meltdown followed soon afterward.
Many hunters who go after a bear share a feeling they’ve experienced: While searching for their prey they’ve come to wonder whether it is they who are looking for bears or whether the bears are actually drawing them deeper into the forest and hunting them.
Could this incredible rally we’ve just seen actually be a bear trap, lulling our fears and luring us deeper into the market, setting us up for painful declines ahead? Let’s hope that concerns like these will quickly be dispelled. In the past three months, investors have paid their dues and then some.
Gerald Harris is a financial and feature writer. Gerald can be reached at email@example.com