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, 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!


*****, “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.




Is the Fed acting like Grinch?

The Federal Reserve on Wednesday again increased short term interest rates by .25%, which is the fourth such increase of 2018.

This move was widely anticipated (and telegraphed by the Fed) for weeks, but recent financial circumstances made the action surprising to many analysts.

We always stress that investors need to be focused on the long-term. At times, writing this blog weekly feels like we are focusing on the short term. However, we feel that it is important to share our thoughts and analysis about current market news and actions.

So while we want to wish you Happy Holidays, Merry Christmas and a Happy New Year….the financial markets are not filling investors stockings with good cheer.

Global stock markets have declined dramatically during the fourth quarter, affecting nearly all asset classes, in varying amounts.

The price of oil has dropped over 35% since early October, due to concerns of slowing economic activity and supply increases, particularly in the US.

What do we think? Does the Fed action make sense? What happens from here?

We have often explained that the Federal Reserve has a dual mandate, to encourage full employment and price stability, which means to maintain inflation around 2%.

Unemployment in the US is at all-time lows and inflation is at or below 2%, and not likely to increase soon given the large decrease in oil prices. Based on the current data, it may be hard to understand why the Fed increased short term interest rates on Wednesday.

The US stock market reacted negatively after the Fed’s written announcement and press conference, as the Chair explained that Board members still predict two .25% rate increases in 2019. However, those are predictions and they are subject to change, based on future economic conditions. The currently projected two increases for 2019 is reduced from their internal projections earlier this year for three 2019 increases.

The Fed acts independently and we hope that their actions do not cause the economy to slow too much. The Fed is supposed to focus on their dual directives, and not react to the stock market or political pressures, which they are clearly not doing. Maybe the Fed sees the US economy as stronger than the stock market is fearing. The stock market can be very volatile and investor psychology can change quite quickly, as it has a number of times during 2018.

Short and longer term interest rates have nearly come together, as of Wednesday afternoon. This is called a flat yield curve. The 2-year US Treasury note yield is 2.68%, while the 10 year US Treasury yield is now 2.77%, declining from 3.24% as recently as November 8th.

The implications of these interest rate moves is that longer term borrowing is now cheaper than it was a month ago, which should be better for the housing and vehicle sectors, than 4-6 weeks ago.

In November, the stock market declined in response to the sharp rise in the 10-year yield to above 3.2%, but the stock market has not rebounded as longer term interest rates have dropped, due to slowing economic growth concerns.

We do not know what the stock market will do in the near future. We know that enduring losses is not easy. We wish we had a crystal ball, but we don’t.

We don’t know exactly what someone like Warren Buffett is doing right now. However, based on his past actions and speeches, we would assume that he and Berkshire Hathaway would be buyers, not sellers. He has often said it is wise to be “fearful when others are greedy and greedy when others are fearful.” In other words, when others are fearful and stock prices have dropped, it may represent a good time to buy, or at least, not a time to sell.

We feel that to reap the long-term benefits of investing in a globally diversified stock market portfolio requires patience and discipline. This is one of those times, where patience and discipline are encouraged. We feel that in the long term you will be rewarded.

We are here for you, if you want to talk to us, to review your portfolio or discuss your concerns.

Happy Holidays!

Why we recommend an Investment Plan

As a baker or chef, you would use a recipe.

As a football coach, you would develop a game plan.

As investment advisors, we believe all investors should use a written investment plan.

Having a written investment plan, which we call an “Investment Policy Statement” (IPS), may provide many important benefits to investors and can lead to a better relationship with your advisor.  But having an IPS is not a guarantee for investment success.

The IPS that we develop for each of our clients provides a framework for how their assets will be invested and managed over time. The IPS provides the initial asset allocation, based on a client’s financial situation, risk tolerance, time frame and goals, among other things. Before we begin to invest any client funds, we discuss the IPS with our clients and both the client and our firm signs the IPS.

Having a written investment plan, which helps to guide future decisions and actions, can assist an investor in understanding the advisor’s strategy. For example, our IPS addresses that the investment time horizon is long term (defined as longer than 5 years). Our time horizon and decision making are not based on daily market news or current events. Our IPS explains why we recommend utilizing a globally diversified portfolio and acknowledges that this strategy may not outperform certain indexes over various time periods.

We feel it is important that our clients understand these concepts before we begin to invest on their behalf. We try to educate our clients and discuss these concepts with them.

Having a written investment plan can be helpful in remaining disciplined during difficult market conditions or when current events seem to be negatively affecting financial markets. We generally do not make major changes to a client’s IPS based on the past performance of a specific asset class or because of future predictions or expectations.

We would (and do) modify an asset allocation (IPS) based on changes in someone’s life situation, such as changes in assets or as someone gets older. The key is that changes in the investment allocation are more driven by personal changes, whether good or bad, and not based on predictions about the future of the stock market, interest rates or politics. We strive to provide rational and evidenced-based advice, not decisions driven by emotions, guesswork or predictions.

Risk tolerance is also very important in planning and developing an IPS. We provide written information on how poorly the proposed allocation would have done over many decades in the past. Why do we focus on the negative, and not the positive? Because by showing someone how much a proposed asset allocation did during bad time periods (such as the worst one year to three year losses for a given asset allocation), we are trying to determine if the investor will be able to handle the potential downside of this allocation. We don’t want investors to abandon their investment strategy due to down periods, which will inevitably occur again and again, during an investor’s life.

Having a written investment plan can be an important and evolving document for your financial life.

Like a great recipe, if an Investment Policy Statement is well prepared and followed, it could lead to a good outcome.

We also hope that a written investment plan may help you be more confident and have a greater sense of peace of mind.

Handling the stock market roller-coaster

Investing in stocks can be like riding a roller-coaster.

You know the roller-coaster will go up and then you know it will go down.

But you don’t know what will happen after the first hill…….until you experience the ride. You have to endure the entire ride.

The roller-coaster experience is similar to the volatility investors are now experiencing  in worldwide stock markets.

Volatility means how much something goes up or down.

In stock market terms, the more volatile a stock or asset class is, the more the increases or decreases are, as compared to other stocks.

You will note that increases are part of the definition of volatility. But for most investors, they can easily handle the “volatility” of increasing stock prices.

It is the decreases (losses), such as have occurred recently, which cause most investors concern. Most investors dislike volatility when it is associated with down stock markets.

The 2018 decline should be considered normal, on a historical basis, even if it has not been enjoyable to experience.

You want to know why these losses are occurring and when they will come to an end.

We do not have good answers to these questions. No one really does. Sometimes markets react to all kinds of news, information and investor psychology.

Today’s message is that during times like these, investors need to be disciplined.This is when investors need to remember that losses are temporary, unless you sell your stocks in a panic.

It is nearly impossible to consistently time the markets, as it is quite difficult to predict both the decline in advance and call the bottom of a downturn. Thus, remaining disciplined and adhering to your personal Investment Policy Statement will likely prove to be a solid strategy over the long term.

Investors who have an allocation to fixed income should be re-assured, as that should provide you with cash and liquidity for your near-term spending needs.

This is when you need to remember that your stocks are long term investments…..and over the long-term, which is many years, you should expect positive returns from your stock investments.


We don’t know how long the down portion of this roller-coaster ride will be.


Buckle up. We are here for you for the duration of the ride….


If you have questions, you want to discuss the markets or the impact on your personal situation, please contact us. This is why we are here.