I wanted to start out this article with a YTD chart of the S&P 500 Index from cnbc.com to illustrate what a volatile year 2018 has been in the equity markets. As you can note, we’ve had some swings, but more in detail, that the downturns seem to be more “steep” than longer term trends in years past. Another important note is that we have just tested the years lows from February, March and April yet, but many news headlines, in our opinion, may be using a little hyperbole to make you think otherwise. The major market indices are down 3-4% for the year, which is not too alarming.
While our economy still has very strong fundamentals, i.e. historically low taxes, both personal and corporate, wage growth, positive corporate sales and earnings, low unemployment, still historically low interest rates, positive GDP growth, high housing prices, strong consumer spending, healthy M&A growth and reasonable inflation rates, the equity markets are having troubles with continued growth. Many large companies are sitting on more cash than ever before.
With 2017 being such a steady growth uptrend in the markets, more volatility was expected for 2018. One thing that may contribute to this is technology. Information is being shared faster than ever before, but trading technologies are also faster than ever. Many algorithms will trade based on headline keywords, twitter feeds, volatility and/or downside percentage triggers.
As many of our clients know, we have models that share in these risk management overlays built to protect against catastrophic losses. While we do not guarantee against any losses, we are aiming to perform better in the long run by losing less should severe corrections occur like that of 2000 – 2002 and 2007 – 2009. An example of this is referencing the chart above, this model traded 50% out of equities in February’s steep downturn and again in October’s steep downturn. This same model remains in 50% out of equities still in December. Should the market continue downward, it will continue being traded out of the equity market in 25% increments to protect against a severe loss.
Historically, 10% corrections are quite common, as are even 20% corrections in normal economic cycles. Some of our other actively traded models are carry 25-30% in cash for protection on the downside as well to also purchase back in at “discounted” stock prices.
Many analysts have predicted a positive end to December with retail sales growth and consumer staples remaining strong, but we will wait and see what the next couple weeks hold. One of the biggest threats to the equity markets seem to be the geo-political risks with the Trump administration, especially regarding tariffs and trade war discussions. This may likely lead to continued volatility in the next few months. Other potential threats are European and Asian markets in negative territories for a variety of reasons, mostly political, with some economic growth slowing. Emerging markets may prove to be a profitable sector over the next decade.
There are some other leading indicators that are showing signs of a domestic economic softening and some analysts predict there could be a potential for a recession in the next 18 – 36 months, according to Russell Investments – Global Market Outlook December 2018. New construction in housing sentiment and building is starting to slow nationally, but data is still considered in positive territory according to the National Association of Homebuilders. The West and South regions remain the highest, while the Northeast is the lowest where affordability remains a concern.
Another area of concern earlier this month was bond yields and how the yield curves were flattening. One day in particular, the 2-year and 5-year bond yields inverted, where the 2 year offered a higher yield than the 5 year. Some analysts have used the 2 year and 10-year bond yield curve as a leading indicator of a recession, as it has been a somewhat accurate predictor in decades past, according to the National Bureau of Economic Research. The last time this inverted was 2007. This could have been an anomaly in the market place, but I’m sure the Federal Reserve is keeping a watchful eye on it, having raised their rates 3 times so far this year.
While no one has a crystal ball to predict the forecasting of the equity markets, we believe the fundamentals are still strong in the short run, but remain cautiously optimistic in the long run. We have built many of our client’s portfolios to help protect against severe losses on an annual basis using risk management overlays, fixed income, quarterly indicators, and fixed indexed insurance products all for diversification for portions of portfolios. Remember, if you suffer a 10% loss, you need 11% to breakeven. However, if you suffer a 40% loss, you need a 67% growth to get your portfolio back to breakeven. Shortening this recovery timeframe could be an instrumental part to long-term retirement savings and potential future income.
If you’d like a complimentary second opinion on the potential risks, taxes, and fees for your overall financial and income planning, please reach out to Douglas Marion with Advanced Wealth Strategies at (704) 450-8352 or Douglas@AdvancedWealthStrategies.org.
Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Adviser. AlphaStar Capital Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level or skill or ability. Insurance products and services are offered through individually licensed and appointed agents in various jurisdictions. Any information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Investing involves risk, including the loss of principal. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The views presented in this article are the views of Advanced Wealth Strategies, Inc and does not necessarily represent the views of AlphaStar Capital Management, LLC.
Share on Facebook
Share on Twitter
I'm busy working on my blog posts. Watch this space!