2018 — the year in review
At the beginning of 2018, the S&P 500 Index was about 2700. Then there was fluctuation in between and reached the highest price at 2901 on Sep 14, 2018, which was highest in the past 20 years (conversely, on Mar 9, 2009, the index was closed at 676.53, which was lowest in the past 20 years). After that, it has dropped to 2500 at the end of the year. The rate of return in 2018 is -6.24%.
From 2008 to 2013, Federal Reserve System had executed three Quantitative Easing (QE1: December 2008 to March 2010; QE2: November 2010 to June 2011; QE3: September 2012 to December 2013) whenever the unemployment rate was high and the economic activity was inactive. Also, FED quickly lowered the federal funds rate from more than 5 % in early 2007 to 0.25% at the end of 2008, mainly because of the weakening of the economic outlook and increasing downside risks to growth. Which indeed made business owners easier to do business and stimulate the economy from 2009 to 2018.
However, according to the situation in 2018, the interest rate has been slowly climbing since 2015, in order to defeat rising inflation, and there were four hikes (from 1.75% to 2.5%) in 2018 despite heavy criticism from President Donald Trump. The higher interest rate was not a good thing for business owners and bad for lenders also because of higher borrowing costs in a bad economy. Apart from that, there was a serious US-China trade war this year:
- Total US tariffs applied exclusively to China: US$250 billion
- Total Chinese tariffs applied exclusively to the US: US$110 billion
China used to grow at 7%(GDP Annual Growth Rate) or more and now seems to be struggling to grow at 6% in 2018. Also, there is a high chance that China will influence the growth of the United States and Europe if the trade war escalates in 2019.
Was S&P 500 Index at 2901 the highest price until the next recession? Or is it possible to rally again and break through 2901 in 2019? It’s not impossible because the current S&P 500 PE Ratio is around 19.06, which is much lower than the value (123.73) in May 2009.
This new year, 2019, will the Fed execute one more QE (debt-driven economic growth) and stop increasing interest rate? If so, the bubble can be bigger and S&P 500 will still have room to grow.
Another interesting thing to note is that China has been constantly accumulating gold since 2001. The Gold Reserves increased from around 400 tonnes to 1842 tonnes. Why does China want to do that?
The U.S. debt to China is $1.138 trillion in October 2018. That’s 29 percent of the $3.9 trillion in Treasury bills, notes, and bonds held by foreign countries. Will the dollar collapse if China, Japan, and other countries start selling the dollar and stop holding U.S. Treasury Securities? What is the new reserve currency? Will the International Monetary Fund issue a new global currency for the members who have more voting power? Time will tell us in 10 years.
Note: quantitative easing (QE)= Fed buys government securities from banks (Fed adds credit to the bank’s reserves, which gives the bank more money to lend to consumers)
