To be sure, investors are grabbing the headlines and obsessing about certain aspects of the market these days, such as the inverted-yield-curve mania.
Our call of the day, from Katie Nixon, chief investment officer at Northern Trust Wealth Management, says investors are spending way too much time thinking about that and not enough on what she sees as a big wild card for markets in 2019—a possible return of inflation.
“If we’re all wrong about inflation, that’s where things start falling apart, with problems in the credit area and problems in negative implications for the market,” Nixon told MarketWatch in an interview. She says investors in general have a fairly benign outlook for inflation, and meanwhile central bankers are dealing with too-low inflation.
In short, it’s on Nixon’s radar, but she doesn’t see investors giving it near enough thought. “Stuckflation [inflation going nowhere] is our base case…so much is riding on that strong belief that that’s something we certainly discuss. We need to be right about inflation,” she said. Her advice is to keep an eye on the data and watch out for what companies are saying about rising prices.
According to Investopedia, high inflation periods can be positive for value stocks, but less great for growth stocks, but notes that for companies, a surprise jump is hardest as it takes several quarters to pass along those higher prices to consumers.
As for 2019, Nixon expects a higher finish for the S&P 500, with some help coming from China as its massive effort to boost growth will be the tide lifting all global-economic boats. But it’s going to be a bumpier year, and investors should “buckle up,” she says.
“We would say expect the old normal of volatility to characterize the market this year as investors become more comfortable with a forecast of this year as investors become more comfortable with the forecast of a very dovish Fed and low growth and low inflation,” she says, even though Northern Trust is keeping a close eye on the latter.
So a 5%, 10% pullback would be considered entirely normal in this situation, though drops of around 20% are less normal, she says. As investors will recall, came perilously close to that bigger drop on Christmas Eve, when it was down 19.8% from a Sept. 20 record close.
The potential for bumpy days doesn’t mean investors should run scared from this stock market, she said: “I think the last several months provides a cautionary tale for investors, danger of being out of the market can be really high, you miss these best days and you really damage your returns.”
She says it helped its clients steer through the bumpy holiday period and last year’s volatility with a simple strategy: “The only way to adequately prepare for inevitable volatility is by making sure you have enough in risk control assets—cash and high-quality fixed income is what you lean on during times like Dec. 2018.
“It’s what you live off during very difficult market periods and lets you avoid selling stocks at the bottom,” she said.
The market
Investors are waking up to more central-bank chatter on Wednesday, with comments from ECB President Mario Draghi and a shift by New Zealand’s central bank (see more central-bank speak in The Economy). But the mood is downbeat, with Dow US:YMH9 S&P 500 US:ESH9 and Nasdaq US:NQH9 futures are in the red. Tuesday’s session saw solid gains for the Nasdaq COMP, +0.71% Dow DJIA, +0.55% and S&P 500 SPX, +0.72%
The dollar DXY, -0.09% is flat, while gold US:GCU8 is up crude US:CLU8 is lower.
Europe stocks SXXP, -0.30% are mostly lower, getting no joy from Draghi comments. It was a mixed session for Asian equities, but New Zealand stocks NZ50GR, +1.30% surged 1.3% after the central bank surprise dovish rate outlook, which sunk the kiwi NZDUSD, -1.4476% In China, profits at industrial companies fell sharply at the start of the year.
The chart
Our chart of the day comes from Joel Kruger, currency strategist at LMAX Exchange, who commented to MarketWatch that “there have been distressing signs in an unsuspecting FX market that could be an early warning sign for investors to reconsider bullish bets” on stocks.
LMX Exchange
He notes how the euro relative to the Swiss franc EURCHF, -0.0089% , traditionally correlated with risk appetite, has tracked lower against a path higher for stocks.
“Switzerland’s central bank, the SNB, has been very active in its efforts to battle against unwanted appreciation in the Swiss Franc and EURCHF 1.1200 appears to be a line in the sand. If broken, it could confirm this deeper distress in the global economy, not yet reflected in global equities,” said Kruger.
The economy
Stephen Moore, potential Trump nominee for a seat on the Federal Reserve Board, said the central bank should immediately reverse course and cut interest rates by half a percentage point, in interview with the New York Times on Tuesday. Meanwhile, Dallas Fed President Robert Kaplan went the other way in an interview with The Wall Street Journal.
The data calendar is light for Wednesday, with just the U.S. trade deficit for January due ahead of the open, with an appearance from Kansas City Fed President Esther George after the close.
Read: The eviction crisis is starting to look a lot like the subprime mortgage crisis
The buzz
WellCare WCG, -3.93% shares are soaring after health-care group Centene CNC, -3.86% said it would buy the managed-care provider in a deal valued at $17.3 billion.
Southwest LUV, +0.12% is taking a hit after downbeat first-quarter guidance.
Tesla TSLA, +2.82% CEO Elon Musk is set to square off against the Securities and Exchange Commission on April 4 over whether he should be held in contempt of court. The spat centers on a tweet he sent out about the number of cars the company will make this year.
McDonald’s MCD, +0.95% reportedly will no longer lobby against a rise in the minimum-wage laws.
Read: Dow spinoff to take DowDupont’s place in Dow Jones Industrial Average
An online copyright bill was approved by EU lawmakers Tuesday, but big tech companies worry the law is too broad and will hurt businesses and creativity.
Another big Brexit vote looms in the U.K. Wednesday as the nation’s deeply divided parliament gets ready to vote on alternative proposals for their preferred option on the next steps in the process to split from the eurozone.
Random reads
Fighting a measles outbreak, New York suburb bars unvaccinated children and teens from public places
The yoga pose that can land you in the hospital
The man behind the last perfect March Madness bracket
Twitter makes a PDA regarding a birthday-change prank
We’ve noticed a prank trying to get people to change their Twitter birthday in their profile to 2007 to unlock new color schemes. Please don’t do this. You’ll get locked out for being under 13 years old.
— Twitter Support (@TwitterSupport) March 26, 2019
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