We’re in the 25% Zone

We’re in the 25% Zone

Monthly Outlook: December 2018  Happy holidays!  There are just 20 more trading days in 2018 and most of those will be low-volume as we get closer to year-end and holiday season.  A lot could happen in this last month but it’s a pretty good bet that we’ll end up about where we are now.  So, the question is, “Where are we?”  Well, we’re in the 25% zone. Looking at S&P500 returns back to 1928 (90 years of data!), we can see that the market has been up 75% of the years and down 25% of the years.  The average has been +9.6%/year.  Another way to look at the market is compared to its 200-day moving average (m.a.), or what we call the trendline.  The S&P500 has been above it about 75% of the months and below it 25% of the months.  As we said in last month’s Outlook, October was a pivot month where the S&P500 broke below its trendline for the first time in three years.  That puts the S&P500 back in a downtrend, or in the “25% Zone” (because it happens only 25% of the time).  The semi-good news is that, historically, downtrends have lasted between two and

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October was a Pivot

Monthly Outlook: November 2018  October was a pivot month.  The three-and-a-half-year uptrend is over (for now) and markets have turned to a new downtrend.  As a result, we’ve moved portfolios from growth to protection.  This is the core of our iFolios strategy and most likely why you chose us to manage your money.  During an uptrend, one should “buy the dips.”  But in a downtrend, one should “sell the rallies.”  Don’t get fooled by the pundits and talking heads.  Many of them are guessing about the future which is a difficult task and most of them will be wrong.  Our iFolios strategy simply requires us to read the signs and allocate accordingly.  Today, we read “stop signs” in many markets and so we’re very underweighted global stocks.  We don’t know – and no one else does either – how long or how far this downtrend will go.  We could pontificate about possibilities, but that would be guessing and we won’t do it.  Until we get a “green light” or uptrend signal, we’ll stay in protection mode. Let’s take a look at the markets in more detail.  U.S. stocks dropped a sizeable -7.4% in October.  And most importantly, the market dropped

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POTUS, SCOTUS, and VOTUS

Monthly Outlook: October 2018 September felt like a busy month in the markets but when all was said and done, it was only a marginally positive month.  U.S. stocks gained a mere 0.19% with Energy and Healthcare sectors outperforming the broader market.  The tech-heavy NASDAQ actually lost a scant -0.28% in September.  International stocks were also lackluster, gaining just 0.44% for the month.  Europe is still bogged down with Brexit talks and trade tariffs are hurting Emerging Markets.  The big difference between U.S. and international stocks, and we can’t point this out enough, is that U.S. stocks continue to trend higher while international stocks are trending lower.  As a reminder, we define the trend as whether the index is above or below its 200-day moving average.  For this reason, we remain heavily invested in U.S. stocks for growth and under-weighted international stocks for protection from loss.  Lastly, bonds lost -0.55% in September on rising interest rate concerns.  We’ll discuss interest rates later in this Outlook. Focus on VOTUS From a purely market perspective (not political) it’s apparent that investors prefer lax regulations, low taxes, access to easy credit, and open markets.  Although the U.S. citizenry seems quite split politically, the

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What’s Working, What’s Not

Monthly Outlook: September 2018  Now that we’ve had our Labor Day holiday, we have to concede that summer is behind us.  On Wall Street that always signals a return to seriousness and focus.  Trade wars, corporate earnings, upcoming elections, global central bank actions, debt and valuations will all be studied for clues about year-end market movements.  But before we look ahead, let’s review the markets to see what’s working and what’s not. Global stocks are only up 3.6%, year-to-date (YTD) which is a little low for eight months.  But that doesn’t tell the whole story.  U.S. stocks are up 9.7%, YTD, while international stocks are down 3.4%, YTD.  Looking back at decades of history, we see that U.S. and international stocks are actually highly correlated, moving up and down together.  So, we have to wonder if U.S. stocks will join the international downtrend?  Or will international stocks rejoin the U.S. uptrend?  We’re going to find out over the next few months. Bonds are still down 1.2%, YTD, as the U.S. Federal Reserve (Fed) continues to ratchet up interest rates by ¼% every couple of months.  Analysts assume another ¼% hike is coming in September.  But again, the headline doesn’t tell

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To Go Fast, You Need Brakes

Monthly Outlook: August 2018 Summer doldrums are apparently good for markets as most markets floated a little higher in July. U.S. stocks gained a respectable 3.3% while international stocks gained a similar 2.9%. Bonds, on the other hand, were flat, -0.04% to be exact. Although a gain is a gain, we need to point out that U.S. and international stocks trends have diverged and that is a concern. That is, while U.S. stocks continue to trend higher, international stocks tipped to a downtrend last month as we discussed in our last Outlook. And even though both markets enjoyed a robust month, our outlook is based on the prevailing trend. We remain positive for U.S. stocks but have trimmed back our exposure to the down-trending international stocks. For the year to date, U.S. stocks are now up 6.5% while international stocks are down 1.1%. Bonds are down 1.8%, YTD. As a result, balanced accounts are up low single digits held up only by U.S. stocks for now. FANGs Lose Their Bite As discussed above, U.S. stocks are the best performing major asset class this year. And within U.S. stocks, it’s really the technology sector that has been producing all the gains.

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Disruption is Weighing on Markets

Monthly Outlook: July 2018  For most of this year, we’ve seen global stock markets moving sideways but trending higher.  That is, prices remained above their 200-day moving averages.  That changed in June.  Although the headline market – the S&P500 – remains up-trending for now, many markets just “tipped” to downtrends.  Of course, that means we’ve trimmed our positions in those markets and moved to protection mode.  For the first time in years, you’ll notice that we’re holding some cash and have become a bit more conservative in our allocation mix.  Now is not the time to just sit there with a buy & hold allocation and hope for the best.  Things have changed. Let’s review the broad markets before we delve into the specifics.  U.S. stocks (S&P500) managed a small gain of 0.5% in June and are up 2.5%, YTD. The S&P500 remains stuck at 2,700, give or take 100 points for the past seven months and is at 2,718 as we start the 2nd half of the year.  It is only 1.8% above it’s rising trendline so it needs to hold here.  International stocks (FTSE All-world ex-USA) stumbled in June, falling 2.1%.  Europe was down 1.2%, Asia was down

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Tweets & Tariffs

Monthly Outlook: June 2018  U.S. stocks continue to mark time in May, stuck in a sideways, range-bound channel.  The S&P500 has been stuck at 2,700, give or take 100 points, for the past six months.  If the economy is so good, as evidenced by rising corporate earnings and full employment, then why can’t the stock market continue to advance?  Could it be that the barrage of tweets (from many people) and the constant cross-talk of tariffs and trade wars is just too confusing?  Perhaps CEOs and investors, alike, are unable to commit new capital, frozen with indecision.  More on this later, but let’s first review the markets. U.S. stocks (S&P500) had a decent gain in May, adding 2.4%.  But this market remains stuck at about 2,700 these past six months and is presently at 2,705.  For the past 100 trading days (which is close to YTD), the S&P500 has closed above 2,700 on 52 days and below 2,700 on 48 days.  While it sounds like the market has been dead-on flat and boring for six months, it’s been anything but.  It’s been flat overall, but volatile day to day.  In 2017, the S&P500 had daily moves of greater than 1%

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Manage the Mix

Monthly Outlook: May 2018  Global stocks have now stalled for the past five months as investors digest conflicting inputs.  On the positive side, corporate earnings continue to move higher, but so do interest rates (a negative).  Consumer confidence and employment are high, but so are valuations.  And although the S&P500 is exactly where it was five months ago, there’s been a lot of volatility and conflict along the way.  History shows us that stocks don’t move sideways for long.  We expect resolution soon and for a sustainable trend to develop.  The question is “which direction?”  Will the 9-year uptrend continue or are we about to enter a correction?  It’s also possible that the answer is “both.”  Some asset classes could trend higher while others sink.  That’s why we’re always vigilant and managing the mix in our iFolios.  We’ll discuss that in more detail later, but let’s review the markets first. U.S. stocks (S&P500) gained a modest 0.5% in April but are down 0.5% for the YTD.  International stocks (FTSE All-world ex-USA) gained a similar 0.6% in April and are barely positive for the year, up 0.2%.  Bonds (Barclays Aggregate Bond Index) continue to suffer from interest rates that are creeping

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Wind, but No Storm

Monthly Outlook: April 2018  The first quarter of 2018 was sure volatile but, in the end, there was very little change to the broad market indexes.  By a narrowing margin, the trends remain up, which means we remain invested.  Just like Colorado springtime weather, we’ve seen a lot of wind (volatility), but so far, no storm (new down-trends).  With each burst of nerve-wracking market volatility, it’s natural to feel unsettled and tempted toward rash action.  But the key to investing success is to stay disciplined with a steady, calm, and proven strategy that focuses on long-term trends for guidance.  Our iFolios strategy is just such a strategy and will keep us invested appropriately. U.S. stocks (S&P500) lost just -1.0% in the 1st quarter of 2018, but it took the long way to get there!  The S&P500 first rose 7.4%, dropped 10.1%, rallied 8.2% again, and then sagged 5.2%.  The key is that it remains above its long-term trendline (200-day moving average) but only by 2.6% so it needs to hold here.  International stocks (FTSE All-world ex-USA) took an equally volatile path to finish down just -0.4% for the first quarter 2018.  It, too, remains narrowly positive, just 2.7% above its

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Volatility vs. Risk

Monthly Outlook: March 2018 In case you didn’t notice, February was a bit of a wild ride for stocks.  The S&P500 peaked on January 26th, dropped 11% by February 9th, then rebounded 8% by February 26th.  That’s a very unusual and large amount of volatility for one month!  We’ll talk more about volatility and risk later in this Outlook.  First, let’s review market returns for the month and year to date. U.S. stocks (S&P500) lost -3.7% in February but are still up +1.3% YTD.  The strongest sectors continue to be Technology, Financials, and Consumer Discretionary (mostly Amazon!).  International stocks (FTSE All-world ex-USA) also had a yo-yo February and fell -5.3% for the month, but are up slightly, +0.1%, for the YTD.  Outside the U.S., it’s the Emerging Markets that show the most strength.  Lastly, let’s look at bonds.  Bonds (Barclays Aggregate Bond Index), are down -2.2% YTD and that includes interest.  As interest rates rise, bond prices fall.  And interest rates are rising, as seen by the U.S. Treasury 10-year rate rising from 2.4% to 2.9% this year, already.  With rising rates, it’s prudent to move to shorter-term bonds and you may have seen us make those trades over the

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Stocks Pump, Bonds Slump

Monthly Outlook: February 2018 We’re off to a strong start in 2018!  In fact, it’s been one of the best Januarys for stocks in the past 20 years.  Stocks are on a persistent more-of-the-same run these past few years.  Bonds are a different story, however. U.S. stocks (S&P500) gained +5.5% in January, led primarily by the “FANG” stocks: Facebook, Amazon, Netflix, and Google.  International stocks (FTSE All-world ex-USA) did just as well, gaining +5.7%, with emerging markets outperforming.  Clearly, stocks continue to pump higher and the long-term uptrends remain intact.  Bonds (Barclays Aggregate Bond Index), on the other hand, slumped in January due to the rise in interest rates.  The U.S. 10-year treasury rate rose from 2.40% to 2.72% in January.  That 1/3rd % rate rise doesn’t seem like much, but it’s enough for bonds (Barclays Aggregate Bond Index) to lose 1.24%, total return including interest.  This slump in bonds is a new development that we’ll talk about later. Putting it all together, the benchmark for a 75/25 stock/bond portfolio was +3.3%, for a solid monthly gain. Bond Watch Stocks tend to steal the limelight because they are volatile and exciting.  They provide the bulk of growth (or loss!) to

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Party has Gone Long, but It’s Still On!

Monthly Outlook: January 2018 Happy New Year!  And who wouldn’t be in a great mood after the market returns we enjoyed in 2017?  Last year was the 9th year post-financial crisis, which makes this recovery one of the longest on record without a correction.  But as Newton showed us 300 years ago, an object in motion stays in motion until it meets an opposing force.  And so far, we just haven’t seen a big enough force to unsettle the party.  This “stays in motion” theme is, essentially, our outlook for 2018, which we’ll talk about later in this Outlook. Let’s review 2017 markets before we look ahead.  U.S. stocks (S&P500) gained +21.7% in 2017, led primarily by technology stocks.  International stocks (FTSE All-world ex-USA) did well, too, gaining 27.4%, with Europe, Asia, and Emerging all contributing evenly.  Bonds (Barclays Aggregate) did their part to add stability but only contributed a total return of 3.5%.  So, depending on your mix of growth assets (stocks) and stability assets (bonds), one would expect 2017 portfolio returns in the mid-teens.  Not bad.  Remember that at 14%, your money doubles in about five years. Valuations remain Sky High Enough about 2017 – most investors are

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