Positive market movements started right at the beginning of the year and became the norm throughout 2018, mostly driven by optimism and high stock liquidity.
The yo-yo effect
At some point, a downfall was expected, and the first one happened in February. We noticed the opening sign of it due to artificially overvalued stock, and indicators of both price to earnings and book ratios increasing. Overly hopeful investor sentiment then came to an end and markets went down.
However, as seen historically when the market yo-yo reaches a low, it kick starts a shift upwards, and this is exactly what happened. It produced the next phase of new highs driven by record buybacks.
Stocks seemed to grow a set of wings, the way they kept flying higher and higher. One of the most exciting and striking headlines was the FAANG’s (Facebook, Apple, Amazon, Netflix, and Google) reaching $1 trillion market cap and speculators predicting $2 trillion. A bold statement indeed!
Again, the uptrend was bound to shift back down, and we noticed this happen in October. A key warning sign was financials trending down while the indices were smashing through new all-time highs, showing a difference between investor sentiment and the natural laws of supply and demand.
Markets seek balance like a moth seeks the flame
Now that stocks are cheap again, will we see them bounce back as they consistently have done in the past?
The cycle continues into 2019 with relatively low stock valuations as a result from the continuous rebalancing effect. We may well see new stock highs as a follow on from the downtrend in December 2018.