Markets Sending Clear Warnings That Financial Crisis Could Strike in 2019
Stocks are about to hit the end of the track. The end of the bullish cycle that started in 2009 appears to have finally found the terminal station, inaugurating a new bear market. But will this end with a soft landing or a financial crisis?
As much I’d like to believe that what stocks have witnessed in November—traditionally a bullish month—is a minor correction, my realist side has all but resigned to expect the worst.
One clear sign that investors are gearing up for a financial crisis (implying they’ve lost confidence) is that the Dow, which went up steadily from July 2018 to October 2018 and from November 2016 to December 2017, has lost momentum.
On a year-to-date basis, the Dow is on the negative side.
The Dow’s performance chart for the past two years (see below) speaks two different languages. The first half, leading up to January 2018, rose in expectation of President Donald Trump’s tax cuts.
Chart courtesy of StockCharts.com
In 2018, in response to growth-curbing trade tariffs and some politically heated months, volatility has increased.
Great Anxiety 2019
The chart’s pattern reflects growing anxiety: investors now expect a financial crisis in 2019. Goldman Sachs Group Inc (NYSE:GS) has advised clients it does not feel “very bullish” about stocks in 2019—and it should know, given that GS stock has lost 20% since a year ago. (Source: “Goldman Sachs on 2019: Raise cash, get defensive and look out below if more tariffs happen,” CNBC, November 20, 2018.)
In 2016, the U.S. Department of Justice charged Goldman Sachs with a $5.06-billion fine for its role in selling sub-prime securities, contributing to the 2008 financial crisis. So when Goldman Sachs warns of a recession, investors run for cover.
It all depends on how Trump reacts and performs when he’s pushed against a wall. In the meantime, investors are being pushed against Wall Street.
Rightly or wrongly, concerns that President Trump may force a constitutional crisis, forcing the Russiagate issue to be resolved (one way or another) before the newly elected Democrats take over the House of Representatives in 2019, have only added to the economic uncertainties. (Source: “The walls are closing in on Trump, says “Enemies: The President, Justice & the FBI” author Weiner,” Salon, November 18, 2018.)
Moreover, there are signals coming from Main Street. The much-touted U.S. economy may not be as robust many have been led to believe.
As Thanksgiving approaches, opening the Christmas shopping season, retail analysts have surely started to worry that shoppers will be less enthusiastic with their cash and credit cards in 2018.
In fact, some retail sales associations have produced some foreboding forecasts about their 2018 fourth-quarter performance.
Watch Those FAANG and Tech Stocks
Some of the same concerns about consumer demand for the “iPhones” that sank Apple Inc. (NASDAQ:AAPL) stock have spread, affecting the performance of the so-called FAANG or tech stocks. (Source: “Apple iPhone sales fears rock Wall Street,” BBC, November 12, 2018.)
Meanwhile, investors worry that regulators going after Facebook over privacy concerns will damage tech stocks.
And just as in 2000, the tech stocks, the same that made huge gains over the past years, could trigger the U.S. government to regulate social media to the point of becoming overly intrusive, causing usage to drop.
This time, China and Trump’s tariffs could set off the next tech/Nasdaq avalanche. Investors fear that as Trump continues to subject microprocessor makers in China to higher import duties in the U.S. (ostensibly to bring jobs back to the U.S.), he will price popular products out of the market.
Of course, while Dow Jones serves as an indicator for the world’s richest and most popular stock market, for a true financial crisis, the aversion to risk should be global.
Global Sell-Off
In fact, the wave of sell-offs on Wall Street has both spread worldwide and resulted from global pressure. Asian markets have suffered from the latest corporate scandal.
The arrest of Carlos Ghosn, chairman and CEO of Nissan Motor Co Ltd (OTCMKTS:NSANY, TYO:7201) and Renault SA (OTCMKTS:RNLSY, EPA:RNO), in Japan has contributed its own weight to driving the Nikkei Index down over one percent.
But as concerns over the world economy rise in expectation of more tariffs and trade-discouraging measures, China’s markets teeter on the brink of collapse as well.
One clear sign of low confidence in the global economy’s prospects is the oil price. Oil has dropped from some $70.00–$72.00 per barrel in early October to $53.70 in November.
In a little over a month, the oil price has gone from the highest to the lowest level of the year. While low oil prices were once welcomed in the West because they favored growth, they now point to the coming period of unprecedented uncertainty about the financial markets.
And Then There’s Europe
European stock exchanges might as well have not gained at all since 2016. They’re at a two-year low.
The decline has been such that investors are terrified.
And when investors are scared, they retreat and hide like cats. European investors have plenty to worry about. Trump has threatened to impose tariffs on European cars—and the automobile industry still drives the economies of the biggest eurozone countries.
But as threatening as those tariffs might be, there are bigger issues causing Europeans to lose sleep at night. European investors have lost confidence because of Italy and the United Kingdom.
The financial crisis that’s brewing on Wall Street will spread to Europe.
From there, its effects will be refracted around the globe. Italy and the U.K. will be the obstacles, causing the refraction.
The former has decided to challenge the EU, and especially its dominant French and German leadership. Rome has dared defy budget deficit rules to jump-start the economy. The latter is teetering on a major political crisis, hesitating on the process to leave the EU (Brexit).
Regardless, Italy and the U.K. have weakened European confidence in the political and monetary Union’s prospects. And that will encourage investors to seek shelter in liquidity (if not quite yet gold).
Of course, the world stopped being an island long ago. Interconnections are everywhere and American investors who have little care, let alone awareness, of what’s happening in Europe will pay a price if they’re not careful in the markets.
A financial crisis doesn’t need an invitation or a passport to migrate across borders.
Damned If You Do, Damned If You Don’t
The EU has become one of the major possible detonators of the next stock meltdown in 2019. But the fuse reaches straight to Wall Street, passing through the Federal Reserve.
The Fed’s gradual restriction of liquidity, through interest rate hikes will continue.
“Why not stop the rate hikes?” wonder investors. Stopping it now could send the wrong signal an intensify the pessimism.
After pushing the need to tighten the money supply because of an “overheating” economy (we are told), what kind of message would Powell send by going back?
Such a move would simply betray the fears running through the entire economic system, exposing them and fueling more panic than applying the hikes.
At least, the markets have already absorbed the higher rates factor, even if they’re going to cause intense “refraction.”
A Financial Crisis Often Extends Beyond Economics
Financial crises have often marked the beginning of epochal economic and geopolitical changes. World War II, it can be argued, was the logical conclusion of the 1929 stock market crash and the Great Depression.
The great economic recovery of the 1950s and 1960s in the geopolitical West benefited from the Cold War.
Interestingly, apart from the inflationary pressures from the shift in the pricing of oil—cheap oil helped grease the industrial world’s recovery until 1973—there were no financial crises, comparable to what happened in 1992, 2000, and, of course, 2008.
However, the “financial crisis” cycles do offer a hint about which stocks will best weather, even thrive, in the coming storm, the repercussions of which will last for decades.
Such repercussions are rarely of the optimistic variety; often, they include conflict and war.
As I’ve often written on this platform, defense stocks may drop like all other stocks as fears of a crash intensify.
Yet if the U.S. continues to play the role of global policeman—and under Trump, this has not changed—the defense budget will ensure the big military industrial players like Lockheed Martin Corporation (NYSE:LMT) or Boeing Co (NYSE:BA) and others will continue to run at full capacity.