December drop in most markets pretty much wiped out all of 2018 gains and then some. Canadian stocks measured by the TSX composite were down by -8.9% and the US S&P 500 down by -4.4%. Some of these have recovered in the first week of January.
Following technical analysis, the correction is not over, setting us up for another drop. Depending upon how the US China trade pact develops, that could be the end of this correction or more pain. We are again at the uncertain period when decisions are difficult.
Portfolio managers have to be ready to change direction if what worked in the past doesn’t any more. Even strategies such as diversification fails when you have highly conflicting economic conditions. High growth strategies including technology stocks don’t work as investors doubt if that can continue. Stable income strategy with utilities, pipelines and financials does not work either but curiously for the opposite concerns of higher rates.
What always matters are lower interest rates and higher corporate profits. Last year, US profits were goosed up by tax cuts with one time gain and almost certainly not to be repeated every year. Near full employment and higher wages have led to higher rates.
In Canada, we wait to see how much lower will oil go. Rest of the economy is still humming at least as the wise bankers of Bank of Canada see it. But forecast of significantly higher rates as popularised a few months ago was way off the mark. This fear has however trashed our banks, utilities and other dividend payers. They should recover at least part of their losses which should be positive for our investment strategies of focusing on income.
As a broken record, we stay put until a clearer direction appears. First quarter earnings reports may show us the way. Optimists say a positive first week of the year foretells a positive January and 2019.