December was a rough month in the stock market as the major stock indexes sank about 10 percent. People are wondering what is next.
Back in February of 2018, we had a drop in values of about 10 percent as well. At that time, the drop in values put the market price/earnings ratio back to a historically normal level of 16. However, we wrote that we could expect further volatility, and perhaps a further drop, but stock values rose through November before dropping in December. The net result was the stock values declined about 5 percent from February price correction, and the current price/earnings ratio is around 15, slightly below average.
While the stock market has been suffering, the overall economy has been booming. The regulatory stranglehold of the Obama years has been reduced, and the tax cuts have led to record low unemployment. Workers are returning to the economy and wages are rising. Retail sales and capital spending are at high levels. In normal times this would all push stock values higher.
The problem is that we are still unwinding the abnormally low interest rates instituted by the Federal Reserve to try to mitigate the bad economic policies of the Obama years. The artificially low rates robbed interest income from savers and drove funds into the stock markets, inflating prices. During 2018, the Fed interest rates almost doubled, from 1.25 percent to 2.25 percent, with promises of additional increases in 2019. As a result, funds flowed out of the Stock Market and values declined.
The Fed interest rate increases are also working their way through the real economy. The bank prime rate has increased by 1 percent, 30-year home mortgages by 0.7 percent, and auto loans by 1.4 percent. While these rate increases are a drag on business investment, home sales and auto sales, there has not been any significant slowdown in the overall economy. However, stock investors are worried about the proposed 2019 rate increases, and this concern has put additional downward pressure on stock values.
As of today, with the stock market at a 15 price-earnings ratio, below the average ratio of 16, it looks like the stock market is at equilibrium. However, sell-offs tend to go extremes, so we could still see lower stock prices. And in a world of government shutdowns, trade wars, political gridlock and foreign challenges, volatility seems to be built into the markets.
Looking forward, the real economy seems to be holding firm, but probably will grow at a lower rate as interest rates go up in 2019. If the Federal Reserve and the government don't mess things up, 2019 could still be a good year. But it may be a bumpy ride.
Of course, only God knows what will happen in 2019.
So pray for wisdom, trust God, fasten your seatbelts and keep your eyes open.
Ron Allen is a Christian businessman, CPA and author who serves in local, national and international ministries, spreading a message of reconciliation to God, to men and between believers. He is founder of the International Star Bible Society, telling how the heavens declare the glory of God; the Emancipation Network, which helps people escape from financial bondage; and co-founder with his wife, Pat, of Corporate Prayer Resources, dedicated to helping intercessors.
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