Dow Ends Down Six Points

The American stock market shifted in the third quarter from the Trump rally to the Trump correction starting October 3, 2018. The worst December for stocks since the Great Depression (1931) is most likely a prelude to a very volatile 2019, with modest expectations for the upside, but considerable fear of the downside risk. This pullback is taking place in spite of a strong U.S. economy, low inflation, and continuing consumer confidence and spending.

For the year, the Dow was off six points, the first significant downturn since 2008 at the start of the Great Recession. Oil had a wild year, starting last January at $60 and ending at $46 in spite of restraints by OPEC and Russia.

The collapse of the Dow began after a high of 26828 registered at the beginning of the third quarter on October 3, 2018. The Dow dropped 3883 points before Christmas, recovering to 23327 on December 31 (down 3501 from the October high). It represented correction territory of 13 percent. (See The Buzz: The Trump Correction: Dow off 4000 points since October 3, Dec. 21, 2018)

The Dow has had an extraordinary run since it began climbing a decade ago, up from 10428 at the end of 2009, a 19-point increase for that year, to the 26828 peak at the start of the 2018 third quarter (157% increase),  a more than doubling in a decade. About 9000 of the improvement happened under the Obama administration’s management of the recovery and then the last about 4000 in a burst of energy since November 2016.

Much of the last two-year run-up was driven by investor enthusiasm for the President Trump-Republican economic program of tax cuts, regulatory relief and general business boosterism. As much of the benefits now appear in the immediate past, the next 12 months are much more susceptible to a myriad of risks, many of which are Trump induced:

• The general chaos of Washington highlighted by its partial shutdown
• A Fed still dedicated, if more tempered, at removing some monetary stimulus from the economy
• A global slowdown highlight by China’s consumer pullback, no doubt exasperated by the trade dispute
• Democrats re-taking the House with a hostile corporate agenda and the likelihood of more conflict with Trump as the 2020 presidential campaign ramps up

Since much of the market direction is future-oriented, the prospect of a global slowdown and American recession late in 2019 has investors much more risk conscious. I’m not sure 2019 is a down year for the Dow, but it will be volatile as recent 600-1000-point swings up and down have demonstrated.