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Just When You Thought it was Safe to Come Outside

Earlier this month, yours truly penned a piece which leaned toward the optimistic side.  A rarity since I am not one to wear rose-colored glasses.  We were fresh off what seemed like positive developments on the US trade war with China.  President Trump communicated that the meetings with China’s President Xi went very well.  Like many investors, I took the bait while forgetting the power of a twitter feed and my theme for 2018 of “Making Volatility Great Again.”  Stocks initially responded positively on the news.  The very next day, investors were greeted with a tweet from President Trump self- proclaiming “I am a Tariff Man…”.  Then we learn a top CFO from one of China’s largest tech companies was arrested and being extradited to the US.  US stocks went on to finish the week down close to 4.5%.  Last week stocks continued to slide after a tumultuous meeting between President Trump and Democrats where he threatened to shut down the government.  Markets have a way of humbling us.

I tell this story as a lesson that events can come out of left field over which one has no control.  Headlines matter again.  Last year, the market was bullet proof as pretty much every asset class went straight up with record low volatility.  North Korea was launching test missiles towards Japan and stocks still went up!  This year, we are setting another record, but not one to brag about.  According to research by Deutsche Bank data going back to 1901, there is not another period where so many asset classes are down on a year to date basis.

Are we on the cusp of another global bear market that takes stock prices down over 20%?  We will only know by looking in the rear-view mirror.    Currently, over 50% of world stocks are down 20% or more (see the chart below).  What can an investor do?  Focus on what you can control.  Developing an investment portfolio that is aligned with your goals, understanding the amount of risk that is in your portfolio, having an action plan to respond to volatility (hint – don’t sell low and buy high) and not letting fear drive your decisions are all examples of what one can implement ahead of time to withstand turbulent markets.  With many asset classes in correction mode, the investment committee is evaluating making changes to portfolios where opportunities are emerging.

Over the past 10 years, we have had two global bear markets in stocks.  They have not been fun to live through, but prices eventually recovered and made new highs.  Investors were rewarded for their allocation to risk and being patient.  A walk down memory road, and the wall of worries:

2011

  • S&P downgrades the US Debt
  • European debt crisis/will the European Union fall apart?
  • Fresh battle scars from the 2008 weigh on investors psyche
  • Stocks fell 23% from May 2 to October 4th (155 days).  It took until January of 2013 (456 days) to rebound to prior highs.
    From May 2, 2011 to December 14, 2018 the index is up 53.9%

2015 -2016

  • China slowdown and currency issues
  • Greece debt default spilling over to Europe
  • Oil prices plummet over 70%
  • Global recession fears
  • Stocks fell 19.2% from May 21st to February 11, 2016 (266 days).  It took until January of 2017 (329 days) to rebound to prior highs.
    From May 21, 2015 to December 14, 2018 the index is up 13.9%

2018

  • China & US trade dispute
  • BREXIT, Italy issues – will the European Union survive?
  • Is the bond market forecasting an economic slowdown?
  • Will the Federal Reserve raise rates too many times and cause a recession?
  • Will Trump shut down the government?Please reach out to us with any questions.

    Jon Giordani

 

 

 

 

 

 

 

 

 

 

Performance figures for stocks refers to the MSCI All Country World Index. Data from Kwanti and Morningstar Inc. Past performance is not a guarantee of future performance. An investor cannot invest directly into an index. Before making any investment decisions, consult with your financial advisor.