2018: A Challenging Investment Year
After a record, nine-year upswing, as of Dec. 24th, the major U.S. and international stock indices entered or came near bear market territory, defined as having moved, peak to trough, -20% or more.(1)
S&P 500 (large U.S. stocks), Sept 20 to Dec 24: -20%
Russell 2000 (mid and smaller U.S. stocks), Aug 30 to Dec 24: -27%
MSCI EAFE (international stocks), Jan 26 to Dec 24: -24%
Fortunately, many quality bonds held up for the year, posting a near breakeven result.(1)
Barclays Aggregate Bond, Jan 1 – Dec 31 : +.01%
How bad can bear markets get?
Each is different, of course. But here is a listing of the most notable bear markets since 1950, measured by the S&P 500, i.e., large U.S. stocks.(2)
Peak to Trough Duration
Great Recession, October 2007 to March 2009 -56% 17 months
Tech Bust, March 2000 to Oct 2002 -49% 30 months
Black Monday, August 1987 to December 1987 -34% 3 months
Volcker Inflation Fight, Nov 1980 to August 1982 -28% 21 months
Arab Oil Embargo, Jan 1973 to Oct 1974 -48% 21 months
Mild recession, Nov 1968 to May 1970 -36% 18 months
Bay of Pigs, Cuban Missile Crisis, Dec 1961 to June 1962 -28% 6 months
Average -40% 16 months
Of course, no bear market is average. However, if our current downturn would happen to be, we are half way through the downdraft, after which we would expect the next upturn.
What are the general stages of a bear market?
Stocks drop: stocks fall sharply, corporate profits fall, and economic indicators begin coming in lower.
Capitulation: The financial news is generally “black.” Stocks continue to fall. Some investors feel panic, and may sell near the bottom.
Bottoming: Stock prices continue to drop, but more slowly because low prices are attracting some investors who are looking for bargains.
How has your portfolio fared so far?
Bear markets – or “near bears” – can only be seen as they pass the -20% measuring point. Looking back to the high on the large U.S. stock indices, this downturn may be three+ months along. For that reason, when you receive your usual quarterly report from us next week, you’ll also find that we’ve attached your investment results for the last three months of 2018 – the largest part of the downturn – as compared to key areas of the investment markets. This will exemplify the “cushion” or risk management offered by your strategy.
What steps have you taken to prepare yourself for a bear market?
The key steps that protect us during a bear market are taken before it occurs: making sure that we have sufficient quality bonds and other diversifiers in our portfolios such that we can weather the storm, even if is long and deep. If you are at or near retirement, this may be a good time to calculate how many years you can live on your bond allocation while never selling a dime of stocks (taking into account your Social Security, pensions, etc.). You may find that it is several years. Let us know if you’d like assistance in calculating this. This exercise can help with peace of mind. And, of course, it was also one key factor in establishing your particular growth/protection strategy.
In addition, in the latter half of December, our office took risk off the table, as suitable, by selling lower-quality taxable bonds (for clients who have authorized us to go ahead without checking with them first, this occurred in the 3rdweek of December). These bonds tend to do well in a strengthening economy – like that we’ve had for nine years – but tend to do less well in a serious bear market.
Of course, protection planning is important, but seeking opportunity is as well. Many of you received an email from us indicating a “buy-low” on stocks that swept for you during the low stock market points in late December. Note that each of these “buy-lows” is set to match your unique situation, based on when we last realigned your portfolio, your portfolio size, etc. Our goal is to take advantage of opportunity while not creating more risk than your strategy envisions. Where suitable, we recommend continuing this “buy low” strategy through any further stock downturn, buying in modest amounts to avoid a significant increase in risk, and buying at attractive pricing points.
There is an interesting dichotomy between the relative strength of the U.S. economy and the factors that appear to be driving this bear market.
Factors driving bear market:
Stretched U.S. stock values.
A U.S. economy that is slowing due to low unemployment and rising interest rates (lack of new employees and higher interest costs make it more difficult for companies to grow).
Slowdown in Chinese economy, although it is likely that the Chinese government will continue to seek to stimulate its economy.
Government shut down.
Factors supporting the U.S. and the global economy:
Though rising, low interest rates.
Low inflation rate.
Strong growth in India, whose population is soon likely to surpass China’s.(3)
We can see from the above that if we see positive movement in the government shutdown and trade discussions, some of the market gloom may lift. In addition, we would expect that the Federal Reserve will be sensitive to the impact of its most recent increase in interest rates and may moderate its path somewhat going forward.
If this bear market ends as a mild one, we are still “not out of the woods.” A serious bear market tends to occur every few years, after which we experience the next upswing. A mild bear market may be followed by a one- to three-year upswing, after which can come a “follow-on bear.” As always, caution with an eye toward opportunity is our watchword in serving you.
2018 Total Year Results
Your 2018 total year results will be provided to you next week. During the year, every stock index listed to the right hit a record high before starting its current slide. Quality bonds backed off slightly during the first eight months of the year due to interest rate increases, then lifted slightly nearer year end due to market volatility.
As you know, we will continue to monitor the investments markets – and as importantly, your goals, preferences, and overall financial situation – to provide the advice that we feel is in your best interests. Please let us know questions about your particular situation.
You’ll receive your tax information from Raymond James by Feb. 15th, unless Raymond James notifies you otherwise. Note, however, that we recommend not “pushing the button” to file your return until March 20th, just in case new information arrives.
Despite a year-end filled with volatility, analysis, trading, and communication (as suitable) on your behalf, our team is energized for the coming year. As always, please let us know your comments!
You can find more information at www.raymondjames.com/pointofview.
(1) Data from Yahoo.com.
(2) NBC news, business stocks & economy, Historic Bear Markets.
(3) Wall Street Journal, January 2nd, The World is Getting Quietly, Relentlessly Better.
S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.
The Russell 2000 Index: Covers 2000 of the smallest companies in the Russell 3000 index, which ranks the 3000 largest U.S. companies by market capitalization. The Russell 2000 represents approximately 10% of the Russell 3000 total market capitalization.
MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
Barclays Aggregate Bond: A representation of SEC-registered, taxable, and dollar denominated securities. The index covers the U.S. investment grade fixed rate bond market, with index components for asset-backed securities, government and corporate securities, and mortgage pass-through securities. Must be rated investment grade (Baa3/BBB- or higher) by at least two of the following rating agencies: Moody’s, S&P, Fitch; regardless of call features have at least one year to final maturity, and have an outstanding par value amount of at least $250 million.
Barclays U.S. Govt Long Bonds: Measures the performance of the U.S. Treasury and U.S. Agency Indices with maturities of 10 years and greater, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index.
Gold: Commodities trading is generally considered speculative because of the significant potential for investment loss. The precious metals sector involves fluctuations in the price of precious metals and increased susceptibility to adverse economic and regulatory developments affecting the sector.
This information is not intended as a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended for a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for every investor. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. The Bloomberg Commodity Index is composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as "rolling" a futures position.