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Exuberance and Gloom - Q4 2018

Exuberance and Gloom is a global financial markets analysis made by Stephen Rufino Ph.D, CIIA, Galeo's financial analyst.

“May you live in interesting times” goes the curse and Q4 was certainly interesting. The SP 500 tumbled 14% over the quarter to finish the year down 6%. This reversal was driven by the re-emergence of worries about a hawkish fed, European softness, trade barriers and slowing Chinese growth but also by declining US earning expectations. In Q4, the US markets joined other world markets in making 2018 a terrible year for investors. 

In the quarter, the SP 500 plummeted 14% while its 10-year historical earnings grew 4%, crushing equity valuations and driving sentiment away from the exuberance zone. Implied volatility more than doubled to finish the quarter at 25.4, leading sentiment well below its historical average. Credit spreads widened considerably pushing sentiment down to its historical average. US sovereign short-term rates rose while long-term rates fell, reducing slope of the curve to nearly flat and increasing bond sentiment further towards the exuberance zone. 

In the corporate arena, initial claims rose but remained very low, keeping employment sentiment exuberant. With 12-month earnings rising, profitability sentiment was driven further above its historical average. 

 

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 Exuberance and Gloom - Q4 2018