Since 2008, stocks have rewarded investors with solid returns. Can equity investors count on a repeat of recent history? Well, precise predictions about the market are notoriously difficult to distinguish from luck, and very easy to justify in retrospect.
Risk Factors
This bull market started in 2009 and although it is an adage that “bull markets don’t die of old age”, it is also a bit foolish to assume things will go well simply because they have gone well.
Another factor to consider is industrial activity, often taken as a benchmark of economic health. Industry requires a healthy investment in capital as well as labor, it moves commodities and responds to widespread demand. Copper, being a widely used and necessary metal, provides another hint that things won’t go well for long with this stock market. As this reference shows, bouts of high copper prices sometimes correlate with recessions shortly afterward. This pattern held in the 2001 and 2008 recessions. Note how copper prices have hovered at around $3.15/pound since fall of 2017 and have fallen sharply to $2.66/pound in July 2018. This sharp drop may be due to lax demand that hints at slowing construction and related business activity which heralds a stock market drop.
On the international stage, Chinese and European growth is becoming less and less impressive. Never-mind the tariff issue. Even without it there would be cause for concern as Chinese demand wavers in the face of ever-rising debt and inefficient use of capital by state-controlled agencies that are motivated by politics far more than by market-based rationality.
Lastly, note the low and flattening unemployment rate curve. Over time, one sees a pattern of a flattening dip that precedes recessions. The short and sweet explanation for this recurring phenomenon is that business costs are made of fundamental components: commodities or “parts” and labor. As more people are employed and job applicants have more bargaining power for wages and benefits, businesses, especially those operating on tight margins, have to either absorb the cost of rising wages, pass on the cost to consumers that are then dissuaded by rising prices, or forego the hire and skill sets/benefits that come with it. Every option is basically bad for profits, so, again, earnings and business activity slows down.
While stock markets don’t necessarily “die of old age”, prolonged economic expansions such as this one lower risk avoidance and encourage speculation by lenders and consumers who are assured that the good times will continue at least long enough for their purposes. The flattening yield curve, correlation with a copper peak and subsequent recessions, rising interest rates, and growing hiccups in the international markets could be enough to continue market volatility or tip the stock market down in 2019. No one has a crystal ball to predict the future but it may be wise for some investors to plan for capital preservation as a priority over and above prospective gains.
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