During the 4th Quarter, despite Fed Chairman Powell prognosticating “there’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely”, global equity markets jolted lower, failed to recover, and ultimately plummeted, as weak business indicators collided with perceived policy risks with respect to the Federal Reserve. Commodities also felt the pain of lower prices, and fears that a global economic slowdown began to spill over to the United States from abroad.
By the end of the year, equity markets felt the teeth of a cyclical bear market and the asset classes that provided positive results were the traditional safe havens of cash and gold. The quarter was especially brutal in terms of volatility, and the full-year result was extremely unusual in that few major asset classes offered any relief. The US stock market suffered the worst December since 1931 during the Great Depression. The S&P 500 declined 9.0% in December, and 14% for the Quarter, coming close to taking out much of the gains since the 2016 election. Thankfully in the final days of December, the market reversed course and started to recover.
The peak concern rattling markets was that our global synchronized recovery was headed to a slowdown at the same time the Fed Reserve Bankers were on a robotic path to tighten conditions even further. This fueled the prospect that the Fed could be committing a ‘policy error’ by tightening too quickly and too far. It didn’t help matters that markets seem rattled daily by Washington and geopolitical issues seem unstable.
Although markets have recovered some in January, a great deal of technical damage has been done to equities in the U.S. and around the globe. It appears highs for the current bull market cycle could have already been realized last year. For now, the long-term trend is currently down, and there are still many risks that could ignite fresh bouts of selling. Our belief is that markets may still test the December lows and give us clear feedback on whether a bottom has been formed. Should this late cycle take a turn for the worse, we may be playing more defense again.For now, markets will continue to obsess over the Fed policy rate path, and more importantly, the reduction in the Fed’s balance sheet assets which seem to have moved almost lock step with market gains since the depths of the Great Recession. So the question of the day…must the Fed suspend the reduction (i.e. normalization) of their balance sheet for the longer-term growth cycle to continue?
The ‘glass half full’ result of any bear market is they create great long-term buying opportunities. Overall we feel markets are in a topping out process, but that process can take quite a while and there is still room for upside. To us, this suggests that 2019 will be a year active investing provides value over passive buy and hold.We believe now more than ever it is important for clients to favor tactical investment management approaches that emphasize limiting losses above ‘set and forget’ investing for market gains.
As we look ahead, I am sitting in the cabin of an Alaska Airlines plane thinking of Mark Twain’s muse, “I am an old man and have known a great many troubles, but most of them never happened.” My wife, Tara, and I took a quick trip to the Northwest while our boys are at a Winter church camp over the 3 day weekend. Tara took me on my first snow shoeing hike in the Cascades near Stevens Pass (she finds skiing stressful so we’re trying shoeing). My wife’s happy place is hiking anywhere it takes lots of effort. My happy place is soaking in the tub afterwards having cheers with a brown ale. After 6 ½ miles of ‘fun’ I’m wondering if I’ll ever snow shoe again, and if I need to see a podiatrist. A beautiful day it was!
Wishing you a prosperous New Year. We always welcome and look forward to the opportunity to spend time with you to address your unique financial goals and plans. If you have any questions about your investments or areas we may be of service, please email or contact our team at (800) KGA-4916. It is a pleasure to serve you and anyone you may recommend to us.
Eric W. Kendrick, CFP