Reflections on 2018

Another week in the financial markets. Another week of roller coaster ups and downs.

Last Monday, Christmas Eve, the markets were down based on speculation and fears because the Treasury Secretary called 6 top US bank CEOs on Sunday to confirm there was adequate liquidity in the financial markets. However, there was no previous worry about financial liquidity. This was another day in a brutal December and fourth quarter for most US and International asset classes.

Tuesday was Christmas. Peace and quiet. Calm. No financial market trading in the US.

Wednesday the US stock market roared back with the largest percentage gain of 2018, as the S&P 500 rose almost 5%. This was the largest point gain in the history of the S&P 500 and DJIA indexes, because they are at much higher point levels than they were in the past.*** The DJIA surged more than 1,086 points, for its first ever daily gain of more than 1,000 points.****

Some thoughts as 2018 draws to a close.

  • It is difficult to explain many of the moves of the financial markets in 2018, particularly since some of them are inconsistent with each other.
    • Maybe that is the key, that investor psychology, not facts or logic, can literally change on a dime, or within a few days. For example….
      • the price of oil has dropped by 40% since early October.
      • the Federal Reserve has increased short-term interest rates during 2018, yet the 10-year Treasury Note has declined from 3.23% on November 8th to around 2.75% today.
    • Both items are positive for the economy (except for oil companies), as oil and gasoline is cheaper, as are car, mortgage and corporate borrowings.
  • There was not significant, new financial data that should have caused the huge market increase on December 26th. It was pretty clear that holiday sales were strong prior to Christmas, so a few retail sales announcements on Wednesday would not seem to be the source of the rise in 499 of 500 S&P 500 stocks.
    • Was this a change in investor psychology? Will it be short-lived or the start of a market rebound? We wish we had a crystal ball to know.
  • The huge rebound on Wednesday was a good example for our long-term belief of staying in the stock market and adhering to your financial plan. This is why we do not think an investor can successfully and repeatedly, over a long period of time, be able to predict when to get out of the market and when to get back in.
  • Stocks appear to track the growth of earnings and the expectations of future earnings, especially over the long term. In the short term, when a company announces an increase in actual or future expected earnings, the stock usually rises. If they announce lower actual or future expected earnings, the stock generally falls. This makes sense.
  • Despite economic, political, technological and other changes, corporate earnings in the US and worldwide have grown significantly over long periods of time. This is why we consider ourselves to be “rational optimists.”
    • For example, here are the year ended earnings of the S&P 500 for selected years:*****
      • 1990: $40.20
      • 2000: $72.42
      • 2001: $35.22
      • 2008: $17.84
      • 2010: $88.95
      • 2015: $92.21
      • 2017: $112.34
      • 2018: $150-160 (projected for the year 2018)
      • 2019: expected to be higher than 2018
    • Companies strive to be resilient. The ones that succeed figure out ways to adapt, change and grow their earnings.
    • It is hard to identify which ones will succeed, in advance and for decades into the future. It is also hard to predict which regions or countries, or stock markets, will outperform another, which is why we recommend investing in a globally diversified portfolio of companies.
  • There is talk of a recession. And there is talk of a slowing economy or slower growth. 
    • Let’s define the terms properly, as there are huge differences. According to businessdictionary.com, a recession is a period of general economic decline.
      • This is further defined as a contraction in GDP (economic output) for six months (two consecutive quarters) or longer. Recessions generally do not last longer than one year and are considered normal in a capitalist economy, such as the US and much of the world.
    • Why is this important? As many economists are predicting and discussing slower economic growth, few are predicting a near-term recession, or contracting economy in the next year.
    • If the US economy slows from 3% growth to 2%- 2.5% growth, that is still a growing economy, just growing at a slower rate. But that is not a recession.
  • We do not see signs of impending economic doom, such as preceded the housing bubble in 2008 and the subsequent stock market crash during that time period. While stocks in the US may have been overvalued by some measures earlier in 2018, they are much cheaper now. And stocks overseas are even cheaper on a valuation basis than broad US markets.

While 2018 has been a challenging year for most investors, we still believe in the fundamental investment principles which we have recommended and adhered to since we founded our firm over 15 years ago.

We still believe in….

  • Globally diversified portfolios of asset class mutual funds
  • Minimizing your costs
  • Investing in asset classes with greater expected returns than the S&P 500 over the long term, such as small value, International and Emerging Markets
  • Preparing an individual Investment Policy Statement, which allocates your portfolio between stocks and fixed income, based on your needs, goals, time frame and risk tolerance.

We are available to meet and talk to you when you have any questions or concerns. We know that declines in financial markets can be difficult for some to deal with.

Regardless of what happens in the world and in the financial markets, we will be here for you. We will be writing these posts weekly, to help you try to understand what is going on in the economic and financial world, so you can continue to work towards your financial goals.

 

We wish you and your family a Happy and Healthy 2019!

 

*****multpl.com, “S&P Earnings by Year“, Note that the companies in the S&P 500 change frequently, so the earnings in these figures are from different companies at different times.

 

 

 

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