The U.S. Federal Reserve (“Fed”) tabled an emergency 0.50% interest rate cut Tuesday, its first such move since the 2008 Financial Crisis, catalyzing other Central Banks to follow suit. In addition, post cut commentary from Powell “implied additional rate cuts will be forthcoming”. In contrast, two hours before the Fed’s cut, a press release from G7 Finance ministers indicated that they’re ready to act, but not yet. As is so often the case, to quote two clichés, timing is everything and action speaks louder than words.
If one believes the old adage that “as January goes, so goes the year”, then 2020 could shape up to be a volatile 12 months for markets. January’s first day of trading saw the S&P 500 close at a new all-time high (with 5 more during the following 2 weeks) then end the month with a week that featured three >1% daily moves (1 up, 2 down). In between there were several items of news and noise, only three of which ultimately mattered. Similarly, the funds at Forge First kicked off the new decade with mixed performance during January. Our Forge First Long Short LP CL F Lead Series lost 0.36% net of fees while our Forge First Multi Strategy LP CL F Lead Series gained 0.35% after all expenses.
What a difference a year makes! During Q4 2018, the imposition of the first round of U.S. tariffs on imports from China, the cumulative impact of 200 bps of rate hikes from the Fed, and Chairman Powell’s comment that the Fed’s quantitative tightening program was on ‘auto pilot’ served to cause investors to flee from equities. Stocks took a 20% nosedive finishing down roughly 10% for 2018. A year later, Trump was cutting tariffs, the Fed had cut rates three times & since mid-September 2019 the Fed’s balance sheet had been growing at an annualized rate of 40%. Stocks were on fire, up 22% (TSX) to 35% (NASDAQ) for the year and investors chased equities into year end. Now with elevated valuation dispersion (good for ‘value’ stocks) but a modest outlook for growth (good for ‘growth’ companies), many investors are puzzled about what to do. After reviewing December and 2019 as a whole, this commentary will table a few thoughts and our bottom line on 2020.
The attitude of investors towards equities was buoyed last month by optimism that a China U.S. trade deal would get done, belief that the rate of change in global economic activity had bottomed and news that the Federal Reserve was growing its balance sheet again. Whether one calls it QE or not, in joining the Bank of Japan and the ECB, the graph on the below left shows the clear reversal from the balance sheet tightening of late last year. In fact the dashed line of forward estimates on the right side of the graph shows this latest central bank party is just getting started. As a result, after having sold equities to buy money market and bond funds during the past couple of years (please see the graph on the below right), FOMO (‘fear of missing out’) catalyzed investors to start chasing stocks. This renewed buying drove the strong November for stocks, one that included 11 fresh all-time highs for the S&P 500.