Thanksgiving week provided investors with a healthy reminder: When the bear reveals his teeth, the results can be nasty.
A bear market is defined as a 20 percent decline from an asset's 52-week high. In this case, the bear mauled some of the recent market darlings, including the technology sector's stars: the FAANGs (Facebook, Apple, Amazon, Netflix and Google parent, Alphabet), which together have erased about $1 trillion in market capitalization from their recent highs.
While some of the selling was profit-taking after years of amazing performance, there are signs that some of these companies, like Facebook and Google, could face more regulatory scrutiny. That increased oversight could mean that companies have to spend a lot more money to operate and/or they may be prohibited from doing business as usual. The bottom line: Some of the FAANGs could be less profitable in the future, prompting investors to sell.
Zoom out and there is something else going on.
Since the end of September, there has been a growing concern that the U.S. economy is unlikely to maintain its current growth trajectory. Yes, 2018 is likely to see the strongest gross domestic product — estimated to come in at 3 to 3.2 percent for the calendar year — since 2005, when it was 3.5 percent.
But 2019 is not expected to be as strong, according to Diane Swonk, chief economist at Grant Thornton. She credits corporate tax cuts and government spending as the main catalysts behind 2018's shining economy.
But Swonk believes that "the corrosive impact" of tariffs is likely to push up consumer prices. "Almost 20 percent of importers will pass on tariffs to consumers," which will force the Federal Reserve's hand as it tries to keep a lid on inflation.
There was a general consensus that the central bank would raise the interest rate by a quarter of a percentage point at the last policy meeting of the year in December — as it did Dec. 19.
Swonk believes they may have to raise it four times in 2019 (the Fed itself has penciled in three quarter-point increases). Rising interest rates, combined with the diminishing effect of fiscal stimulus, will mean that growth will slow in 2019, leading to a recession in 2020, according to her analysis.
No conversation about the wall of worry that investors face would be complete without noting the following concerns: a further escalation of U.S.-China trade disputes, a rocky and/or prolonged Brexit and an abundance of debt among corporations, all of which have put investors on high alert for the last five weeks of the year.
Speaking of bear markets, a year ago I wrote about the soaring price of bitcoin, the largest of the dizzying array of peer-to-peer digital currencies.
A year later, the party is over in crypto world. Through late November, bitcoin, XRP and Ethereum are all down 75 to 80 percent. During Thanksgiving week alone, bitcoin shed more than two-thirds of its value.
Last year, I noted that bitcoin returns were tantalizing, but only "if you're the type of person who likes to gamble, can take extreme price fluctuations and can afford to lose what you invest." But for everyone else, "Until there is more regulatory oversight and consumer protections, stick to your diversified portfolio."
I stand by that advice whether the price of crypto zooms back up or drops farther. While there has been increased regulatory scrutiny (the SEC levied its first civil penalties and the Justice Department is investigating whether last year's run-up was actually a result of market manipulation), crypto has not grown up yet and should be avoided for the vast majority of investors.