By now it’s widely acknowledged by most investors today that they are relieved 2018 is behind them. They should be as it was a very rough year for both equities and fixed income. I have attached a chart, courtesy of JP Morgan, that shows returns of almost all major asset classes in the RED for 2018. Even some of the fixed income segments were down slightly for the year.
There is some good news to report, however. Growth is still expected to continue, however at a somewhat slower pace. The large drop in the price of oil in the US from $ 105 per barrel in June of 2014 to 45.33 this December will lower costs throughout our economy while increasing profit margins in our energy-dependent industries. Consumers will travel more as the price of gasoline drops. On the cost of money, the FED watchers believe rate increases in interest rates could slow. On security pricing, the sharp market declines in the last several months have driven the S&P 500 P/E ratio down to 14X earnings which are quite a discount from its 25 year average of 16.1X earnings.
This suggests equities could still be somewhat oversold. If a buying frenzy should develop in response to oversold conditions The FEDERAL RESERVE will stand ready raise rates if any major segment of the market gets overheated. Take a look the No Overheating chart above. Real Estate, Motor Vehicle, Private Inventories, and Business Fixed Income all seem to be in a safe range.