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 twenty-six months and have resulted in losses of +/- 0% to -45%.  Furthermore, only 25% of these “25% Zone” downtrends turn out to be serious, with meaningful losses.  Most are short term and shallow in nature so we’ll hope for that.  But since we can’t know for sure, we’ve positioned all portfolios for protection, underweighting stocks and overweighting bonds and cash.  It’s the prudent thing to do and the core of our iFolios strategy.  It’s entirely possible, and 75% likely, that this is merely a two to four-month soft patch that will resolve itself to the upside soon.  But until we see the next uptrend, we’ll stay safe.

Let’s review markets as we enter the last month.  After a big dip in October, U.S. stocks zig-zagged up/down/up in November and closed up +2.0%.  There’s been a lot of turbulence and volatility which is typical for trend turning points.  Think of it as wind when two weather fronts collide.  For the YTD, U.S. stocks are now up +4.3%.  International stocks also dropped in October, but could only muster a November recovery of +1.4%.  YTD, international stocks are down a disappointing -9.7%.    Bonds had a solid monthly gain of +0.6%, but are still down -1.9%, YTD.  Although interest rates spiked higher in January and February, they’ve been fairly flat since then and bonds have actually been pretty stable for the past nine months.  We expect bonds to post modest but steady gains going forward.

Markets Rarely Go Flat for Long

It looks like 2018 is likely to go down in the history books as a flat year (defined as +/- 2%).  The 75%/25% stock/bond blended benchmark is -1.6%, YTD, with just one month to go, which qualifies as flat.  Looking at the S&P500 back to 1928, again, we can see that the market has only been “flat” for seven of those 90 years and we’ve never seen two flat years in a row.  Markets rarely go flat for long!  It’s very likely, then, that we will resume a sustainable trend in 2019, one way or the other.  Until that sustainable trend develops, we’re likely to see more volatility and large daily spikes, both up and down.  We encourage you not to get too excited or despondent on daily news and, instead, continue to focus on the longer-term trend.

A Season of Hope

Another year end is upon us and it’s a natural time of year to celebrate the past with gratitude and to plan with hope for the future.  It’s a time to reflect and to put it all in perspective.  We truly hope you enjoy your holiday season and maybe some slower, yet more meaningful, times with friends and family.

As money managers and fiduciaries entrusted with your investments, we, too, will use this year-end to reflect and review.  We’ll re-look, with a broader and longer-term lens, at markets, trends, valuations, risks, and opportunities.  We’ll re-affirm our mission to grow our clients’ wealth when markets allow it and protect when we have to.  We’ll make sure we have all the right tools, information, people, office, and outlook to accomplish this mission.  We’re grateful for our past successes and your continued trust.  And we’re ever-hopeful that, as your partner, we’ll help you achieve your financial goals that support your dreams.  From all of us, we wish you a very happy holiday season.