MARKETS IN REVIEW
After a relatively calm 2017, volatility roared back with a vengeance in 2018. How much more volatility was there in 2018 compared to 2017? During 2017 the S&P 500 Index had a total of 8 days with a one-day move up or down of more than 1% — 4 up and 4 down. There were no one-day moves up or down of more than 2%. In 2018 there were 64 one-day moves up or down of more than 1% — 32 up and 32 down. There were also 20 one-day moves of more than 2% (5 up and 15 down), 6 one-day moves of greater than 3% (1 up and 5 down), and 2 moves of more than 4% in a single day (1 up and 1 down).
Stocks started the year carrying the strong momentum from 2017 into January before starting to stumble. For a while it looked like, despite their weak start, a rally that started in April would carry equity indices to the same sort of gains they enjoyed in 2017. But the promising middle of the year ended up being sandwiched between a weak first quarter and, after hitting new highs in September, a tough year-end. The worst of the damage came in the fourth quarter, and the bad news bookends left major U.S. indices and equity markets around the world in negative territory for all of 2018. Markets in the United Kingdom, Germany, France, Japan, Hong Kong, and Mexico were among those hit with significant declines in the fourth quarter, and all ended with double-digit percentage losses for the year. The MSCI All Capitalization World Index dropped -13.08% in the quarter to end the year down by -11.18%.
In U.S. equity markets, the Dow Jones Industrial Average (DJIA) fell -11.83%, the S&P 500 Index lost -13.97%, and the NASDAQ plummeted -17.54% during the fourth quarter, bringing their returns for the full year to -5.63%, -6.24%, and -3.88%, respectively.
Indices focused on stocks with strong value characteristics were hit especially hard, falling further into value territory as the prices of the stocks they track became even cheaper. Large company value stocks, as represented by the Russell 1000 Value Total Return Index, dropped -12.32% for the quarter and -10.55% for the year. Small and mid-sized company value stocks, as represented by the Russell 2500 Value Total Return Index, fell by -17.65% during the quarter to end the year down -14.25%.
The year-end drama in the stock market seemed to spark a flight to the perceived safety of bonds. Bond prices move higher as yields fall, and between November 8th and the end of the year, the yield on the benchmark 10-year U.S. Treasury Note fell from 3.23% to 2.69%, resulting in a gain of 4.19% for the full quarter. Other bonds benefitted as well, and the Barclays U.S. and Global Aggregate Bond Total Return Indices gained 1.64% and 1.20%, respectively during the quarter.
Signs of slowing global economic growth appeared to be a drag on commodity prices. The Commodity Research Bureau Index, which provides a broad measure of commodity price trends, sank -12.99% during the quarter. Gold was a notable exception to the falling commodity rule, as its price often rises in times of perceived crisis. It rose by 7.69% during the last quarter but finished the year down by -1.56%.
History suggests that periodic volatility and inevitable market setbacks are the
You say you want a resolution…
It’s that time again, the start of a new year — and a new list of things to do (or not do) which we hope will help us become better versions of ourselves. New Year’s Resolutions generally steer us toward doing more of some things (exercising, reading) and less of others (overeating, spending). Keeping promises we make to ourselves requires discipline and commitment. In other words, they
√ Be Prepared
Expect the best, but plan for the worst. A sound financial planning recommendation is to have an emergency fund in liquid cash or cash equivalents (savings and checking accounts, money market funds, etc.) big enough to cover three to six months of your necessary expenses. Loss of a job, illness, temporary disability, or unplanned expenses can cause real hardship if you don’t have ready access to enough cash to stay afloat until things turn around. You may not want to liquidate long term investments at an inopportune time because you have no other choice.
Step 1 is to add up your necessary expenses, so you know the dollar amount of your target. Step 2 is to see if the money you already have set aside in your emergency fund meets the three to six-month target. If it does, congratulations! If not, step 3 is to decide how much you’re going to save every month to get closer to your target. A journey of a thousand miles starts with a single step. Even if you can’t get all the way there this year, every little bit can mean a lot if disaster hits. As the unfortunate folks whose paychecks stopped when the government shutdown started have learned, bad things can happen to good people.
√ Check Your Pulse
Give your investment plan a reality check. If market volatility has you awake all night when stocks drop or rushing to see how much you made whenever the market jumps, you should probably revisit your investment plan. An investment plan should consider your risk tolerance, but if you’re like most people, your risk tolerance rises and falls with your portfolio’s value. There’s nothing quite like a nine-year bull market to squeeze the caution out of an investor, and nothing like a sudden 20% drop to have it come pouring back in.
Your investment plan should change as your goals and circumstances change. What may be appropriate as you’re starting to build a nest egg may not make sense as you enter retirement. If your strategy is built around a plan to achieve your important financial goals, it will consider how much you’ll need, how long you have to work with, and how much volatility you can afford to endure along the way. Periodically checking your progress and making adjustments can make sense, but making radical changes with every move of the market may end up moving you farther from achieving your goals. The right plan for you will not only consider the return you’ll need, but the investment experience you’ll be able to stick with through good times and bad.
√ Don’t Play Hunches
Stick to your plan. Short term lapses can lead to long term disappointment. If your goals require regular periodic investments, make them as scheduled. If your portfolio has drifted away from your allocation plan, rebalance it. Following your plan may mean leaning against the wind. Market storms may buffet your confidence, or a rapid updraft in prices may pull you toward chasing performance. Change can sometimes be a good thing, but extensive research in Behavioral Finance has found that when change springs from giving in to emotional responses, it is often a very bad idea.
You’re not responsible for the short-term gyrations in the markets, but you are responsible for how you respond to them. Markets will do what they’re going to do. The future is full of uncertainty. A solid long-term investment plan should include a disciplined process for addressing change — not playing hunches on the fly.
Through dollar cost averaging, systematic additions to a portfolio in a volatile market can become a powerful force for compounding should the long-term historical uptrend someday resume. Investing in something that’s out of favor, or selling something that’s all the rage, is how rebalancing helps enforce a strategy of “buy low, sell high.” Responding to changing conditions can be a smart approach to managing an investment portfolio — if the changes are part of a disciplined strategy built into your long-term plan.
Building discipline and risk management into the investment process have been our mission since we first started managing discretionary accounts for our clients nearly thirty years ago. We’ve devoted a good part of our company’s history to developing an approach to investing that’s intended to take both the rewards of investing — and the risks — into account. It’s an approach we designed with the goal of helping investors grow and protect their serious money — the money they can’t afford to lose.
Over the years, we’ve had the good fortune of being trusted by our investors to help them meet their goals, whether that meant providing current income or growth of capital. Their success stories are the favorite parts of our history.
It hasn’t always been easy. Sticking to a disciplined approach while investment fashions come and go
√ Work as hard as we can to help our clients reach their goals.
-Gary E. Stroik
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Past performance does not guarantee future results. The views presented are those of Gary E. Stroik, CFP® and should not be construed as personalized investment advice or a solicitation to purchase or sell securities referenced in the Market Commentary. All economic and performance information is historical and not indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI Investments or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with WBI Investments or the professional advisor of your choosing. All information, including that used to compile charts, is obtained from sources believed to be reliable, but WBI Investments does not guarantee its reliability. Sources for price and index information: Bloomberg (unless otherwise indicated). WBI Investments pays a subscription fee for the use of this and other investment and research tools. WBI Investments and Bloomberg are not affiliated companies.
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Annualized Rate of Return is the return on an investment over a period other than one year (such as one quarter or two years) multiplied or divided to give a comparable one-year return. Dow Jones Industrial Average (DJIA or “The Dow”) is a price-weighted average of 30 of the largest and most significant blue-chip U.S. companies. S&P 500 Index is a float-market-cap-weighted average of 500 large-cap U.S. companies in all major sectors. NASDAQ Composite Index (NASDAQ) is a market-value weighted index of all common stocks listed on NASDAQ. Russell 3000 Index is a float-adjusted market-cap weighted index that includes 3,000 stocks and covers 98% of the U.S. equity investable universe. Russell 1000 Index is a float-adjusted market-cap weighted index that includes the largest 1,000 stocks by market-cap of the Russell 3000 Index. Russell 2500 Index is a float-adjusted market-cap weighted index that includes the largest 1,000 stocks by market-cap of the Russell 3000 Index. Russell 3000 Value TR Index uses the value characteristic book-to-price ratio to create a total return style index based upon the Russell 3000 which includes the performance effect of the dividends paid by stocks in the index. Russell 1000 Value TR Index uses the value characteristic book-to-price ratio to create a total return style index based upon the Russell 1000 which includes the performance effect of the dividends paid by stocks in the index. Russell 2500 Value TR Index uses the value characteristic book-to-price ratio to create a total return style index based upon the Russell 2500 which includes the performance effect of the dividends paid by stocks in the index. MSCI ACWI Index is a free-float weighted index including both emerging and developed world markets. Barclays U.S. Aggregate TR Index is calculated based on the U.S. dollar denominated, investment grade fixed-rate taxable bond market including treasury, government-related, corporate, MBS, ABS and CMBS debt, and includes the performance effect of income earned by securities in the index. Barclays Global Aggregate TR Index is calculated based on global investment grade debt from twenty-four local currency markets including treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers, and includes the performance effect of income earned by securities in the index.
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