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2018 Market Commentary


“It’s been a terrible mistake to bet against America, and now is no time to start.” 

– Warren Buffett
I hope you had a wonderful holiday season. Whether you reached your personal goals in 2018, faced challenges, or are looking for a 2019 reboot, it is worth our time to take a look back at last year. 

Before I get started, I want to revisit a comment from a prior post.

“The momentum generated by a growing U.S. and global economy is likely to carry over into the new year. While a 2018 recession can’t be ruled out, indicators suggest the odds are low. That said, unexpected events can create short-term emotional responses to market conditions can be dangerous to your financial health.”

January 2018 began on a firm footing, building on highs of tax reform, low interest rates, low inflation, and strong corporate profit growth. Stocks rise or fall on the fundamentals and the outlook was quite favorable as 2018 began.

Let’s not forget that market timing is a fool’s errand no one can consistently time the peaks and valleys of the market.  When there’s too much optimism priced into stocks, disappointment often creates volatility and we saw plenty of peaks and valleys in 2018.

A spike in Treasury bond yields tripped up bullish sentiment early in the year. President Trump’s decision to impose tariffs against China and other nations, created uncertainty as the year progressed.   Initially, investors decided trade was no big deal—until they decided later in the year that it was really important and a more than a little bit scary.

Selling began in October and accelerated in December making for one of the most volatile and crazy months I’ve seen during my three decades as an advisor. Several factors contributed to the weakness, primarily fears that rate hikes by the Fed and an all-out trade war with China will stifle economic activity in 2019. 

The trade war with China is now on hold as negotiations have begun.  Time will tell.

Key tech companies, often referred to as “FANG” stocks that had been market leaders for years, lost their mojo and dragged the major averages down for most of December.  For our firm, the steep decline in FANG stocks highlights the risk of concentrating a portfolio in too few names and underscores the benefits of diversification.

As the year ended, the peak-to-trough decline in the S&P 500 Index totaled 19.8%, just shy of the 20% threshold to be labeled a bear market.

International and Emerging markets fared a bit worse, as the global economy shifted into a lower gear and trade tensions rattled many foreign economies.

My thoughts:

When I was in my 20s and 30s, I wouldn’t blink at a stock market decline. My 401k was on autopilot and each pay period, I’d purchase well-diversified mutual funds.

When stocks declined, dollar-cost averaging allowed me to purchase a greater number of shares and I knew it would be decades before I’d need the funds for retirement.

With a very long-term time horizon, even a vicious bear market wasn’t an issue.

As we age, we can’t afford such a sanguine view.  A more conservative mix of investments becomes critical. The confidence that longer-term appreciation will occur helps us sleep at night when market sell-offs arrive and managing risk is key. 

For our most conservative portfolios, the drop in major market averages had only a minor impact on overall long term performance and that’s what we planned for.

What’s in store for 2019

While 2018 began with unbridled optimism, caution ruled the by year end as most major U.S. indexes saw their first annual decline since 2008.

As 2019 begins there is no shortage of cautious sentiment, but those feelings don’t determine the market’s direction for the entire year. Volatile markets challenge our convictions and lure us in the wrong direction.  Don’t be fooled by the media or dragged down by your own emotions.  Wise investors know, markets are unpredictable over the short run and investing is a long-term endeavor.

I find the never-ending stream of market pundits in the media amusing as they are compelled to share their predictions.

Case in point: an October 4th article in the Wall Street Journal “Midterms Are a Boon for Stocks—No Matter Who Wins.” On average, the months of October, November and December have been the top-performing months during any year that included a midterm election (1962-2014).

The pundits were wrong again. 

Our firm builds globally diversified portfolios to help reduce volatility and keep clients on track toward their long-term goals.

The S&P 500 has lost an average of 31% every five years since WWII.  Think about that for just a moment.  Fearing a Bear Market is a lot like fearing Leap Year. 

More importantly, according to NYU Stern School of Business Stock& Bond Returns report, the S&P 500 index has registered a positive annual return almost 80% of the time when dividends are reinvested

Even more noteworthy, the S&P Index has averaged annual returns of nearly 10% since the late 1920’s

During up markets and down markets, we stress the importance of global diversification along with having a clear financial plan.  Down markets are inevitable and having a plan that anticipates volatility is critical for successful investing.

Stocks will hit bumps in the road, and occasionally will hit a major pothole, but decades of data reveal stocks persistently outperform bonds, T-bills, CDs, and inflation.

As 2019 begins, all of us at Pathways Financial Partners would like to wish you and yours a happy and prosperous new year!


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