Winter 2019 Market Commentary
By Marc Usem
This Is What Volatility Feels Like
The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next. — Ursula K. Le Guin
As everyone is aware, the last quarter of 2018 was a sharp deviation from the first nine months of the year. At the end of September, 2018, the S&P 500 Index was up 10.37%. The last quarter saw a sharp drop in prices and the Index ended the year with a loss of 4.57%. The peak to trough drawdown during the year was a harrowing 19.4% drop, close to the bear market definition of a 20% decline. International markets fared much worse during 2018. International developed markets were down 13.8% and emerging markets were down 15.3%. The U.S. bond index managed to gain 0.09% on literally the last day of the year. Thirty-year treasury bonds rallied in November and December, helping to dampen the equity slide, but still generated a loss of 2.04% for the year.
No one likes losses. Nevertheless, intellectually, we know the following:
1. In order to get a return greater than cash, we must take a risk.
2. Over long periods of time, investors have been rewarded for taking risk in stocks.
3. Returns are negative in about 30% of calendar years. In other words, the market losses for 2018 are completely normal.
4. Historically, investors who have stayed the course during down years were generally rewarded over time, while those who abandoned their strategy have generally underperformed (Per Dalbar’s Quantitative Analysis of Investor Behavior study).
Today, we see both strengths and weaknesses in the economic environment. On the positive front, we have 20% corporate earnings growth in 2018, historically low unemployment, modest inflation, and a stimulative tax policy. On the negative side, we have a fragile international economy (due in part to Brexit and Italian banks’ bad debts), increasing interest rates, and trade wars. While risks of a recession are elevated as compared to a year ago, they are certainly not guaranteed. In addition, many of the negatives are policy decisions that could be changed at any time. As such, we do not recommend abandoning your strategy at this time. What’s more, for savers, this is a great time to be adding to the market, when asset prices are “on sale.”
We believe the three hallmarks of a successful investment strategy are patience, discipline, and faith in the future. Patience is the understanding that wealth is built slowly over time, and that success is not market timing but time in the markets. Discipline is sticking to your long-term strategies, and understanding that large moves today are but a tiny blip years from now. Faith in the future is believing that our economy will continue to grow, technology will continue to transform the way we live, and the world will be better tomorrow than it is today.
We believe that it is reasonable to expect volatility to continue into 2019. If you are feeling uncomfortable, or concerned about your investment strategy and asset allocation, please don’t hesitate to reach out to your advisor. Making sure your asset allocation is appropriate for your risk tolerance, risk capacity, and long-term goals is one of our most important responsibilities. We are here to help.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. These unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
