Investment Commentary – January 2019
February 8, 2019
In the fourth quarter of 2018, rising interest rates and the signs of decelerating economic growth crashed the richly valued stock market. Large U.S. stocks lost 13.8 percent of their value, and small U.S. stocks gave up 20.2 percent. However, this correction has brought the stock market from its historically high valuation down to more reasonable levels, and may even set the stage for a market rally in 2019. It is even possible that momentum investors could push stock prices to a new record level. Despite this, the issues of rising interest rates and decelerating growth are eventually going to resurface. When they do, it will be against a backdrop of very expensive financial assets. As a result, the U.S. stock market remains vulnerable to significant fluctuations.
Much of this uncertainty can be attributed to the staggering amount of debt that has been generated in the last decade. After the financial crisis of 2008, the Federal Reserve embarked on a decade-long policy of historically low interest rates in the hope of reflating the economy. The policy succeeded in stimulating economic activity, resulting in economic expansion, and driving the unemployment rate down to the low single digits. This post-recession economic expansion was fueled by debt though, and debt is now increasing more rapidly than economic growth.