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Welcome to 2019!  According to Deutsche Bank 2018 was the worst year since 1901 and depending upon the asset class, declines were between 10% and 60%.  While I cannot definitively write 2018 was most the volatile year on record, it definitively feels like it was.

It was the worst December since 1931 and the worst month for equities since February 2009 according to CNBC.

Many iconic luminaries from Buffet to Soros, from Druckenmiller to Cooperman, from Dimon to Bogle have commented about the unbalanced markets, the result of technology based trading and legislation that crushed liquidity.  The environment is so toxic that Treasury Secretary Mnuchin has ordered the SEC to “look into current market mechanics.”

Because of market volatility many are dogmatically stating the economy will enter into a recession in the intermediate future.  I ask how can any conclusions be made given 85% of volume is the result of technology based trading whose only parameter is momentum and capitalization, a view that is supported by several financial luminaries mentioned above?

Bloomberg writes there have been 14 bear markets since WWII and only seven indicated a “prolonged economic contraction.”  Bloomberg write selloffs that are the result of a recession, the S & P 500 declines 37%.  The selloffs when a recession does not occur are about 24%.

I reiterate my long held view that growth will continue to surprise on the upside, a view that is supported by the Federal Reserve’s econometric models.  I must write the Fed is neither omnipotent nor omniscient and its forecasts are about accurate as the private sector brethren, but it at least a view that offers evidence/justification rather some hyperbolic unsubstantiated comments on the blogosphere.

Tomorrow December’s job data is released.  The statistics could greatly influence market perceptions about the strength of the economy.  Because of the government shutdown, several data points have not been posted thus suggesting some economic opaqueness.

Commenting about yesterday’s market action, volatility again reigned.  Markets were down over 1% in early morning trading, rebounded to a 1% advance only to close unchanged.  Oil was down over 3% earlier in the day only to close about 3% higher on news that Saudi Arabia reduced its exports to the US by the margin that it had stated 6 weeks ago.

If the market is ultimate forward looking indicator, why was oil trading around $56/barrel about 6 weeks ago when Saudi Arabia announced its plans to reduce exports and around $42/barrel six days ago?   Yesterday crude traded to down to around $44/barrel only to close around $47 when the export levels were reported.

Is this an example of the markets ignoring stated potential outcome and focusing instead on momentum?

Inflation is defined as too much money chasing too few goods fearing higher prices tomorrow.  It is a two part phenomena…part monetary and part psychological.  Five years ago if Saudi Arabia announced its current intentions, crude would have surged.

Inflation psychology can radically and instantaneously change. If psychology does change dramatically, will there be an outsized surge?  Based upon today’s trading mechanics, the answer is yes.

Last night the foreign markets were down.  London was down 0.35%, Paris down 1.15% and Frankfurt down 1.25%.  China was down 0.93%,  Japan down 0.31% and Hang Sang down 0.26%.

The Dow should open considerably lower following Apple’s revenue shortfall, the result of weakness in China.  Is this a positive or negative for the US trade stance?  I think it is a positive for as written many times, China is an export denominated country whose is dependent upon the west for its growth.

The 10-year is off 6/32 to yield 2.65%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.