A Gummy Bear market?      Decent rebounds during the first half of January have settled nerves a little after financial markets around the world continued to slide throughout December. 

It has been a pretty severe correction, there is no doubt about that, with the Australian sharemarket (ASX 200) and the US Dow Jones index dropping 14% and 15% respectively between their highs at the beginning of September and Christmas.   This prompted talk from some circles of an extended, severe bear market but this came rather quickly to be referred to as a ‘gummy bear’ market as opposed to a grizzly bear market.  The main reason for such a distinction was that this correction, or near correction, has no Recession lurking behind it.

It is true that volatility has been heightened by not just the usual geopolitical matters but also by world growth figures that are slowing – we are ‘synching lower’ as one economist put it.  But positive economic growth even at a rate that is lower than anticipated, is still a vastly different thing to a recession which is characterised as consecutive months of negative economic growth.

The US Fed:  soon after Christmas the Federal Reserve Chairman announced that, rather than being inclined to ratchet up US interest rates according to a programmed schedule, they would now make interest rate decisions based on economic data. This is much the way our own RBA operates.  This immediately lightened one of the great investment market worries of economists and investment managers; a risk we had highlighted in previous newsletters.  This announcement, along with an expectation that the US and China will find a way to resolve their trade conflicts, helped financial markets claw back some of the December quarter losses and hopefully find a slightly more stable footing as 2019 opens. Our ASX 200 has regained 7.5% since Christmas and the US Dow Jones has bounced by 7.4%.

Outlook:  All analysts remain cautious as all the same geopolitical risks are still present. See below for an interesting article on the Brexit choices facing the UK government. Stock picking skills are a must, and all eyes will be on Australian companies’ reporting season in February, particularly earnings guidance.   A couple of managers sit on the pessimistic side of the fence with Franklin Templeton for example noting that household savings rates are reducing and the brittle housing market in the southern capitals will cause further losses in confidence.

But investment managers are seeing some very good value now and are starting to invest your money into companies that were very expensive in the December quarter but now appear to be bargains. This is what long-term investing, through cycles, is all about.

China vs USA:   one of the dynamics behind the Chinese/American economic wrestle at present is China’s march towards becoming the world’s largest economy and wanting to exercise some of the benefits or powers that come with it. Of course this would come at the expense of the current #1 placeholder, and they’re not happy about the idea.

If economic size is determined by gross domestic product (GDP) then China is fast closing the gap as the chart below shows. But it is interesting to note that on the measure of purchasing power parity, China actually passed the US in 2014 and currently accounts for 18.7% of the world economy with the US at 15.2%.  [Source: The Big Issues of 2019 – Craig James, see full piece below].

Sources:  RBA, MorningStar Research, Bloomberg, Perpetual Investments, Ausbil Inv, Magellan Global, Franklin Templeton, Investors Mutual.