Now that we’ve had the opportunity to hear from company managements regarding December quarter performance and initial 2019 outlooks, we can conclude that results were decidedly mixed. Those factors that hampered growth in December- trade war fears and interest rate concerns, leading to a dramatically declining stock market, are apparently very transitory. Since the Christmas Eve Market bottom, equities have powered higher, notwithstanding disappointing earnings. The investor appetite for risk is back and the market leadership has returned to technology.
Importantly, the companies leading the way are those that factor into a new innovation cycle. A cycle that features new software and hardware infrastructure, changing applications, better security, and new approaches to old challenges (access to any kind of information, on any desired device, at any time, from anywhere). Even healthcare companies are benefitting from innovation, particularly biotech. And here again, a renewal of investor risk appetite is reflected in various equity prices.
The Market is likely discounting the sustainability of this cycle. After all stocks don’t look inexpensive based on near term outlooks. Moreover, there may be some expectation that earnings actually accelerate from here- plausible if a reasonable trade accommodation is made with China.
So, what can go wrong? The China deal blows up. Brexit becomes an economic nightmare entangling the EU in a sustainable economic decline, the political environment in Washington becomes untenable threating those policies that have led to economic success to name a few issues. Yet for all these worries, the innovation cycle will likely power through. Prudent investors would be well advised to take advantage of any Market corrections because we believe the strength and longevity of this innovation cycle could surprise.