Thank the Fed for the surge! The S&P500 posted its best January performance in 30 years (since 1989). Following a nasty 4th quarter and very difficult December which ruined the year, the Fed offered numerous reassurances in January that it was not inclined to make a policy error. Fed Chairman Powell shared that policy action would be more data dependent; rate increases and tightening monetary policy would not be on “auto pilot” in 2019; this was a stark difference from the tone conveyed in December. We believe January market action was mostly a reaction to a pause in rate hikes. It provided tremendous “fuel” for the strong rebound of +8.0% in the last month. Hey, that’s a bit stronger than the January 2018 performance start of +5.6%. Yet, there is one notable difference…last January, 51% of investors expected higher stock prices which did not materialize for the year; today, only 31% expect higher prices. Domestic and foreign stocks rebounded, and client portfolios benefited from the market boost in January (note the difference a month makes).
After an impressive 4-week rally, US equities appear to be butting up against arguably their first formal area of technical resistance being near the 200-day moving average. The broad-based strength that began the day after Christmas is in recent days turning decidedly more sideways; for the week ending January 25 the Dow managed to finish slightly higher and extend its weekly winning streak to 5, but the S&P500 (considered to be broader and more representative of the overall market) slipped slightly.
US equities capped a 4th consecutive week of gains, bringing US equities back roughly +13% thru this past Friday from its Christmas-eve lows. As one might anticipate, the markets are also off to an extraordinarily strong New Year start with the S&P500 up +6.6%; encouraging, more economically sensitive areas of the market like small-size companies are faring even stronger over that period with gains of roughly +10% (Russell 2000). Most of that strength is being attributed to a more collaborative narrative surrounding trade negotiations between the US and China, as well as a more data-dependent and cautious Federal Reserve as it relates to normalization of monetary policy. The only missing element of full improvement from a domestic policy perspective at this point is that the US government remains partially shut down and there is little sign of either side appearing willing or desirous of reaching compromise. In any event, the stock market’s strong rebound serves valid reminder of how quick and suddenly direction can reverse course in financial markets, even as worries are not fully resolved.
Following the worst performance for the S&P500 since 1931, the tone so far in these early weeks of 2019 is more hopeful. This is evidenced by broad and strong consecutive-day winning streaks; the S&P for instance was up +2.6% last week and +3.6% month-to-date. Even stronger are some areas of the market traditionally considered risk-seeking; the small-cap Russell 2000 climbed +4.8% last week and +7.4% in January. Key commodities viewed as a bellwether to economic growth including oil are also seeing their price recover notably off stressed December lows and international equities are participating in-line with the S&P. The cause? From a fundamental perspective, very little. But Fedspeak turned decidedly more dovish from the worrisome pre-disposed and not-so-data-dependent (toward additional hikes) tone that Chairman Powell conveyed with the rate decision in December.
Below, we submit our latest quarterly installment of Nvest Nsights. The first article reviews how chaotic, volatile, and disappointing was the market’s performance during 2018. But more important from our perspective is how swift selloffs like witnessed during the 4Q can cause one to suddenly feel confused and uncertain about the future; in these times it is most critical to step back and consider facts and fundamentals to avoid short-term action based on emotion. The article “Shilly-Shally Prone” reminds how long-term investment success accrues to those who remain steadfast to a repeatable and disciplined process. There are two remarkably similar historical backdrops which suggest it is very possible that present-day concerns could resolve or fade quickly against a still-sound economy, providing swift relief to recent market volatility here in 2019. Finally, “We Work With Rock Stars” provides insight into our investment selection philosophy with rationale motivating several portfolio adjustments being executed over recent weeks and as we enter the New Year.
The full printer-friendly version of our newsletter, including data tables for selected mutual fund and ETF performance as well as portfolio benchmarking, can be downloaded here: NVEST NSIGHTS 4Q.
According to a recent study, 90% of Americans will spend more time planning for vacation than they spend planning for retirement. Similarly, we often observe firsthand how many do not truly know where their money is spent; and they do not devote time to gain more clarity about it. Life becomes a foggy trip without rich meaning.
No one purposely sets out to have an undefined financial life… it just happens to us as we become a part of the culture in which we live. It’s human nature which spans all of time; we repeat actions generation after generation. One of the wisest men to ever live, Solomon, offers sage points in the Bible’s Ecclesiastes which can be simplified to these thoughts:
Uncle Sam stole the year-end Santa rally. The worst December since 1931 and the worst Christmas Eve stock market performance of all time occurred this year. From my perspective, it is all politics this December. Yes, our great Uncle Sam “Scrooge” stole Christmas and a small positive investment performance for 2018. It traces to bad politics coming together in a “perfect storm.” A “perfect political storm” is the coming together of at least 2 bad events at the same time. We count at least 3 negative political charges right now: the Fed, Tariffs, and government shutdown (budget).
With just 5 trading days remaining in 2018, Santa is missing, failing to deliver any holiday cheer more familiar to investors at this time of year. Even a lump of coal might feel better at this point. Instead, the ill-behavior of financial markets would suggest that something very bad is happening to the global economy. On the heels of a -1.2% slide during the week ended December 14, the selloff intensified with the S&P tumbling another –7.0% for the week. It was the worst week for US equities in 10 years, and stocks are now off more than -12% for the month. Smaller-size US companies are generally faring even worse with the Russell 2000 small-cap index down -15% for the month and crossed the bear market threshold of -20% from its peak. The tech-heavy Nasdaq is also officially closed in bear territory on Friday (12/21) from its peak after leading the charge throughout most of the last two years. But regardless of size, US stocks are decidedly negative for 2018 to varying degrees.
Barron’s front cover over the weekend (12/15/2018) read “2019 Outlook: US Stocks Could Rally More Than 10%”; while the New York Times front page (12/15/2018) was “The Best Place to Put Money? Your Mattress” and in the Style Section (same paper/date) read “Are You Ready for the Financial Crisis of 2019?” Quite divergent headlines on the same day.
As we noted in these pages at the beginning of last week, we find it simply remarkable how quick the market’s mood can change against a fluid and stressed environment like the recent two months. Entering the week, the stars seemed to be aligning for those hopeful a more dovish Fed and collaborative tone between the US and China over ongoing friction about trade might develop. As recent as last Monday, optimists were starting to feel as if the storm clouds were receding during the final week of November, and a much longed-for Santa Rally in December might be starting to take shape. Then, with seemingly little warning, the bears were awakened again with declines throughout the balance of the week. The carnage began to unfold Tuesday, with blame by the media mostly being attributed to investors having second thoughts about the trade truce with China, although less recognized was a troubling development in Europe with British Prime Minister May suffering a setback in her government and undermining the Brexit proposals. We also believe that the inversion of the yield curve among some shorter maturities likely triggered indiscriminate and heavy risk-off program selling of US equities exacerbating any fundamental concerns. Despite the tail end of a strong multi-day rally on Monday, and the market being closed in honor of the passing of the 41st President Bush on Wednesday, the major US indexes still found themselves -4.6% in the hole to conclude the first week of December. From a psychological standpoint, the market backdrop is feeling increasingly pessimistic. Most challenging however is for investors to try and keep in mind how quickly the environment could take a turn for the better again seeing as how so many of the worries are “man-made” and policy-related.