2018 Q4 Commentary

Full Transcript:

Happy New Year and welcome to our first quarterly review! Looking back on 2018, there were many things that made for an interesting year. Politics and personal things aside, the markets gave us plenty to contemplate.   

My travels in 2018 lead me to another year of Gold status with United but also gave me strength in perspective as I was frequently able to see the world from 30,000 feet, 10,000 feet and 1,000 feet. Depending on the location, 30,000 feet is frequently far more breathtaking then 1,000 feet.  

I find it helpful to use those same perspectives in many areas of life, especially investing.  By the time July arrived, we were looking at what seemed from 30,000 feet to be another potentially great year for the SP500. A closer look at 10,000 feet revealed that only 3 of the 11 sectors of the SP500 were actually doing as well or better than the SP500, lead by technology and somewhat reminiscent of the early 2000s¹. A 1,000-foot view really put things in perspective, whether we are observing from the window of a plane or through the rosy lens of the media’s take on the SP500.  

What we found in the SP500 was an entire index being led by three stocks, responsible for 71% of the SP500s overall performance as of July 10, 2018². That gave good reason for further consideration - Should those stocks be owned in the portfolio or are they potentially problematic because of valuations, momentum or other reasons? Our conclusion was that with our great responsibility in managing your portfolio we will always maintain a strong diversification among domestic  and international equities as well as fixed income. 

Moving on to the fourth quarter of 2018, October saw a 6.94% decline³ while December brought a loss of 9.18%³. The previously mentioned three stocks experienced declines of 25%, 28% and 11%, respectively over the quarter⁴. Overall, we experienced the worst December stock performance since 1931⁵.  

Despite this market activity and the challenging environment across broad asset classes, there are points of optimism that would suggest the outlook for 2019 remains somewhat positive. Fundamentals remain strong, the economy is growing at a sustainable rate, and labor markets are as healthy as they have been in decades. In addition, inflation remains under control and corporate profits are still expected to exhibit growth into 2019. All these things and others should help stabilize the markets in 2019⁶. 

That being said, there are also reasons to be cautious including the largest layoffs ever in the construction industry in December (13 years of data) and mortgage applications at their lowest in 18 years⁷.

My belief is that we are much closer to the peak than the trough of the current market cycle. We’ve been in a bull market since March 2009 or about 117 months, which is the longest bull market in history. The average market cycle since 1937 has lasted about 39 months. Market cycles are defined as peak to peak, or trough to trough.  

Despite this, market indicators do not suggest such extreme market movements as the 2000 to 2002 Dotcom bubble or the 2008 financial crisis. Domestic interest rates are not expected to climb substantially and interest rates across the globe remain extremely low. Just because growth is slowing does not mean growth is stopping. Earnings and economic growth are still expected to be realized in 2019, just not at the incredible pace experienced in 2018.  

A recession seems increasingly unlikely in 2019 given the current data, reflecting that the bear markets like that experienced in late 2018, do not necessarily suggest a recession. Interestingly, the average recovery of a bear market that does not occur with a recession is 11 months while the average with a recession is 34 months⁹. 

As always, time will tell. In the meantime, we remain diligent in our efforts to serve you well and welcome your feedback on our first quarterly market commentary video. Thank you for your trust and confidence and for choosing us as your partner in reaching your financial goals.  

Resources:

1. Stock Market & Sector Performance. https://www.barchart.com/stocks/market-performance
2. Just Three Stocks Are Responsible For Most Of the Market's Gain This Year. Michael Sheetz - https://www.cnbc.com/2018/07/10/amazon-netflix-and-microsoft-hold-most-of-the-markets-gain-in-2018.html
3. S&p 500 Monthly Return: https://ycharts.com/indicators/sp_500_monthly_return
4. Bigcharts: Stock Charts, Screeners, Interactive Charting and Research Tools. http://bigcharts.marketwatch.com/
5. 2018 Was the Worst For Stocks in 10 Years. Chris Isidore - https://www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html
6. Webber, A., & Schwartz, E. (2019, January 10). Cambridge: 2018-2019 Perspective [E-mail to John Enright].
7. Gundlach: Junk Bonds Face Double-Dip Bust as Powell Capitulates. Evan Simonoff - https://www.fa-mag.com/news/gundlach--junk-bonds-face-double-dip-disaster--powell-capitulates-42664.html?print
8. JP Morgan Asset Management. U.S. 1Q 2019 Guide to the Markets. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer
9. Q1 2019 Market Outlook:taking the Long View. https://www.cioninvestments.com/insights/q1-2019-market-outlook-taking-the-long-view/