The stock market appears to have experienced a cathartic event as the recent decline painted out three consecutive 80% down days followed by a 90% up day on December 26th. Then two violent rally days have contributed to the signs that at least a short term bottom has formed.
For now the entire bear market decline may have run its course, and the resumption of the bull trend has begun. However should we reach new all time highs or numbers close, we will need to institute a heavily defensive position. As we have stated previously, growth can’t go on for ever, and what growth we see now is just that created by the volatility referred to in the first article.
Given the behavior of the market during the recent weakness, we are quite suspicious that the larger and complex bear market is the most probable and still on track with our expectations. Obviously, the market’s behavior during the first quarter will be critical to the actions required vis-a-vis risk and portfolio management.
Our views from the above described are best explained as “The End of the Beginning.” We expect to see some performance for the next few months. This was just the first phase of the end of the bull markets. Please keep in mind, bull phases exist within a longer Bear market, just as the opposite exists within a longer Bull market. The numbers we see coming out of the government and employers, continue to be strong. I want to reiterate, though, that these are lagging factors.
We still strongly suspect the end of 2019 will be larger phase of the Bear market. Whether it is triggered by political or economic events continues to be a question. One we are working on the answer for every day here.
The year began calm enough, had a rough patch early on, then some solid growth until the fourth quarter. October came in with a bang. All the political and economy based factors came to a head. Growth across the board peaked and we continue to see good numbers from businesses and low unemployment. As we have said in previous newsletters these are items that occur near the end of a cycle.
Typically these factors become the driving force behind large institutional money. Simply put, when normal growth is at maximum, the only way to create growth is through volatility. Those large institutions will start to create ranges in the market. They sell when a specific number is hit and buy back when a bottom number is hit. The bottom number is usually in a range where the common investor is too scared to hold onto their investment. Volatility is by definition a range bound item. When we have strong growth we see a steady upwards trend, and the inverse, when we have weakness we see a steady downwards trend. The peak volatility in any given market is usually at (or close to) the top or bottom.
As we come to the end of 2018, we have seen most U.S. indices reach new all time highs. As previously discussed employment is at maximum, pay is increasing and businesses are turning out fantastic numbers.
It has been incredible, the growth we have seen, however these are all things that confirm we are reaching the top. There is an ebb and flow to the economy, historically we see roughly 7-8 years of growth and 2 years of drop. Though this is not a perfect view, over time its fairly accurate when looking at the larger picture. During any individual year alone we do see interim dips and growth.
The first point to take away from all of this is, investments can go up and down, but the right investments will go up more than down. The second point is to not fear the downturn, rather plan effectively for it. Most money is made within the opportunities created within a bear market, a strong bull does not create buying opportunities. Since we seek to get the best companies at the best prices, you can’t do any better than strong companies dipping in price merely because everyone else is dipping. The final point to take is that money never decreases, it just goes somewhere else. The meaning behind that is simple, if our economy turns around, another economy somewhere else is turning the other direction. Which reiterates the fact that we should not fear the downturn rather see the opportunity it is.
With the above stated points, we will be taking a hard look at the more volatile investments we hold. We will look to raise some cash taking some of these holdings off the table, while they sit at all time highs. The tax implications within taxable accounts will be closely watched in order to best mitigate any capital gains. Finally we will start to investigate emerging markets and other investments as we progress into 2019.
As always we are here to help and answer any and all questions. Have a wonderful Holiday season and a fantastic New Year.
Political Risk has been our strongest driver these past 3 months. On many a specific day, over this past period, we could see massive moves in either direction. The obvious benefit of the volatility is the buying opportunities it creates for us. However the obvious negative is the inherent risk we see creeping up in the market.
Regardless of how any of us view the current leadership of our country, we must all accept that divisive speech can spook the market. It leads us back to the old Wall Street line “ Buy on the rumors, sell on the news.” This has so far been good for us, and has played out quite accurately. We have seen numerous situations where speech drove the market in either direction, but once we saw the real policy behind that speech, things settled.
We see this trend continuing for the rest of this year, but with this trend we still expect to see a solid 5% of total market growth at the end of the year.