What Just Happened?
We hope that you and your family are enjoying a blessed holiday season!
Despite record Christmas sales and strong consumer sentiment, the markets delivered a big bag of coal for investor stockings this year. After a wild ride in January and February, the U.S. markets bounced and grinded higher into October then fell, rose, fell again and rose again into December. Since then, it has been ugly, at least until the post-Christmas relief rally that recouped some of the losses. The S&P fell into bear market territory on Christmas Eve before closing just shy of a 20% decline since September. Foreign markets have struggled all year and have also recently sustained heavier losses. Since the Fed has been raising rates this year, bonds have been little help. As of last week, over 90% of investable markets were down for the year meaning there have been few places to hide.
When markets decline so much so fast there is usually a reasonable and fundamental reason for it. The last time there was a decline like this? October 2008. Yep, months after hedge funds blew up, banks failed and the economy was tanking. So, it begs the question as to what could possibly be so wrong right now. The somewhat surprising answer is: nothing significant. Now, if you work with us and have read and listened to us over the past few years you know we have been cautious because of a very sluggish economic recovery and very lofty stock valuations, particularly in the U.S. We have reminded folks that we’ve really been borrowing from future returns as valuations went up and that we shouldn’t expect the next ten years to be as good as the last. But none of that explains such a sudden and violent drop in stock prices.
Remember, in the current recovery it’s only been this year that the economy really got going in a material way. The accelerating economy is why the Fed just started raising rates in the past couple years. The continued pace of rate increases seems to be one thing that may have tipped the markets further south in the past week as many investors hoped the Fed wouldn’t raise again as the President loudly proclaimed they shouldn’t. Also, the uncertainty over a government shutdown and continued uncertainty over trade issues likely unnerved many market participants. And finally, it’s likely that selling begot more selling from program trading. The bottom line is that it’s impossible to accurately say exactly why what happened did happen, and that it could have been accurately predicted ahead of time. While there were longer-term headwinds, the more immediate reality is that markets “should” have finished the year fairly strong. But that is exactly what makes this business both fascinating and at times quite challenging.
A few weeks ago, the CEO of AT&T was interviewed about the economy and their business. One of the most telling things he said after discussing the strong growth they were seeing this year was the growing negative sentiment among people. He said, “it feels like we’re almost talking ourselves into a downturn.”1 As I said at the beginning of this piece, holiday sales are strong and there is no evidence of a slowdown in the U.S. But back to the markets. Torsten Slok, a well-regarded economist said this just late last week, “I have a Ph.D. in economics. I am the chief economist at Deutsche Bank Securities, and I spend all day thinking about the explanations of why the stock market goes up and down. Usually there’s a good explanation, be it from earnings revisions, new economic data or surveys of sentiment. The very unique thing about markets since October is that we have on all three fronts seen little change whatsoever (emphasis mine). If you look at all these data, it is just really strong, and it can’t justify the decline we’ve seen in the stock market.”2
Based on what Slok said, it could be argued that the markets could see a sharp rise, especially when the current political standoff over the wall is resolved. We hope this will be the case, but we don’t know. We stated in a recent commentary that risks around the world have been rising, which caused us to reduce our weighting in international stocks. One of our investment strategies has been raising cash to help buffer the downside risk in domestic stocks. But as we stated earlier, when markets fall this much this fast it’s hard to get out of the way. Charlie Munger, the long-time sidekick of Warren Buffett once said that an investor should be prepared to have sustained periods of losses, including up to 50% of their portfolio. We reluctantly agree with the first part but work very diligently to not let the second part happen for our clients. While we take proactive steps to protect our clients in downturns, the other part of the equation is avoiding panic decisions and selling out. We have met with many folks over the years who sold everything when they got very nervous, and regretted that decision later as it was often at or near the bottom of a market cycle. So, while this doesn’t feel good right now we want to encourage you to turn off the noise on TV or computer and know that things will likely get better sooner than later. We are here to guide you toward your goals and ask that you contact us to discuss any concerns you have.
We wish you and your family a Happy New Year and look forward to what should be an interesting 2019!
Stephen C. Coggins
Chief Investment Officer
IronGate Partners is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.