They Don’t Always Go Up
A market decline was overdue. 2018 was the first year since 2008 that over 90% of major asset classes declined. The December declines were the worst since 1931. The 20% decline from September’s market peak pushed us into bear market territory. Bear markets tend to occur about every 3.7 years; there have been 32 since 1900. For perspective, this 20% decline pales in comparison to the 86% drop in the 1930’s, the 57% drop from 2007-09, or the 37% drop from 2000-02 (and let’s not forget the technology lead NASDAQ decline of nearly 80%).
The President has made the market a barometer for his success; strange, no tweets taking credit for 2018. He must have been preoccupied trying to save face in his border wall standoff, or not? It’s ironic he voiced concern with saving face on the one-hand yet has shown no such regard for allies or enemies in trade negotiations. Not a lot of art in these deals. The Chamber of Commerce President noted these uncertainties are beginning to “affect businesses, federal workers, and the economy.” Consistency goes a long way in helping markets and businesses grapple with uncertainty.
Trump, and others, were quick to blame market declines on the federal reserve for raising rates. Yet the Fed and its new chairman have clearly communicated its position on interest rates, and all rate hikes to date were widely anticipated. Fear of further rate increases may have aided the selloff, but it’s usually more than one factor that causes market declines. If the stock market fear was only about rising rates, why did December’s declines occur while interests for almost every maturity were also declining?
Asset Class Review
In the U.S. high valuations and fear of rising rates started the worrying. Then Apple, FedEx, Delta, and Toll Brothers were a few high-profile names issuing profit warnings. The global economy is showing some signs of weakening and international markets were plagued by trade war tensions and a stronger dollar. Worthy of note: Vanguard recently advised clients to increase their international holdings due to favorable valuation.
Oil prices tanked along with equities, showing it is an unreliable diversifier against stock market declines. Gold rallied in the second half as equities declined. Copper continued trending lower.
The aggregate bond market finished the year flat. Long dated maturities lost money; shorter dated maturities stay positive.
The Truth Behind Selloffs: Fact Check vs. Fake News
Predicting market declines isn’t a precise science. It’s educated guesswork. Research shows the odds of correctly predicting market movements are 50-50 at best. You can lose a lot of money being right on direction and wrong on timing. High U.S. valuations, trade tensions, the sugar high of tax cuts wearing off, a government shutdown, domestic political tension, and global politico-economic concerns all weigh on asset prices. Market sentiment is a moving target: January’s must have asset, Bitcoin, fell 73% by year-end.
Fact Check: in December the dominant trend of interest rates was lower for almost every bond maturity when the stock market suffered most of its decline. The yield curve flattened throughout the year, suggesting an economic slowdown or odds of a recession are rising. No fake news there.
Fact Check: speaking of educated guesswork, Jeffrey Gundlach is rightly known as a very smart investor. For 2018 he made 6 predictions for different asset classes: 3 were right, 3 were wrong. 50-50 odds are called a coin flip. While clever commentaries might be interesting, there’s no evidence they provide consistent ways to grow your money.
Fact Check: the so-called smart money hedge fund managers are supposed to thrive in volatile markets with superior short-term trading prowess: they didn’t. And they continued, with rare exception, to lag the benchmarks as they have for the past 10 years.
Fact Check: While the economy and the market are connected, they are not the same. Since 1946 stocks have declined more than 10% without a recession 17 times (2 times in 2018). The correction was overdue, and we may see more before it’s over.
Fact Check: we live in a global economy designed in the wake of two world wars because it was believed that closer economic, military, and security ties was a practical way to better align diverse national interests and avoid a World War III. It isn’t perfect, but we haven’t seen a world war since 1945. Rational negotiation would make sense to right some of the systemic imbalances. Dictating to the world’s 2nd largest economy (China) doesn’t. That will most likely create a short-term ripple effect, that could produce a long-term wave. Global supply chains will take time to adapt, in some case they won’t be replaced. There will be a cost for everyone because nobody wins in a trade war.
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