Newton’s 3rd Law of Motion posits, ‘To every action there is always an equal and opposite reaction.’ Just like an object in motion, January’s recovery in equity prices seemed to follow this rule. Global equities were down 9% in December, and then up 8% in January. This is just about “Par for the Course” when it comes to stock market corrections: they commonly feature dramatic price declines, followed immediately by sharp recovery.
While corrections are no fun, they happen regularly! In fact, going back to World War II, the US equity market has experienced an average correction of 14%, on average every year. We experienced two such corrections in the 2018 calendar year. Unpleasant as they are, we must remember that they are a natural part of market volatility and eventual price appreciation. It’s those pesky bear markets that keep us awake at night. Unfortunately, bear markets typically don’t follow Newton’s laws and they can last for a couple years or longer. The most severe Bears have taken 5 years or more before surpassing their previous highs.
For savers, depressed markets should be viewed as opportunity to invest in low equity prices. During bear markets, savers should try to tighten their belts and pile away as much in savings as possible. Opportunities like the 2008 Financial Crisis, and the Dot-com bubble that began in 2000, presented savers with incredible discounts, and opportunities to purchase equities at fire-sale prices.
For retirees withdrawing cash from their portfolios to pay for living expenses, bear markets are taken more seriously. The risks and impact of making a mistake in retirement are heightened, but we believe bear markets also present withdrawal investors similar opportunity. To combat bear markets, you must have a plan! You should have a written financial plan and strategy in place to not only withstand bear markets, but to exploit them as well. If you understand and prepare for the next inevitable bear market, you will not be surprised, nor should you need to sell equities while they are down.
It will be worth restating our overall philosophy of investment advice here at Concentus. It is goal-focused and planning-driven. This is dramatically different from an approach that is market-focused and current-events-driven. Every successful investor we have known was acting continuously on a plan; failed investors, in our experience, get that way by reacting to current events in the economy and the markets.
For several years, the technology sector has displayed very positive momentum, especially compared to most other sectors of the broad market. In recognition of this relative strength, the opportunistic allocation of our portfolio has favored technology & internet stocks.
You may or may not be, familiar with the term FAANG stocks. FAANG is an acronym for some of the market’s most popular technology company names: Facebook; Amazon; Apple; Netflix; and Google. These companies make up a large portion of the overall equity market, and have contributed a good deal of price appreciation to the current bull market. Therefore, it was interesting to note the price movements in the FAANG stocks from the beginning of the recent market correction until now. We mark the start of the correction as September 20th, 2018, which was the date of the last stock market high for many broad indices, while the bottom of the correction was Christmas Eve, December 24th, 2018. See the staggering declines in the FAANG stocks versus the Global Stock Market through Christmas Eve…making for a not so Merry Christmas:
However, the FAANGs, from the market bottom on Christmas Eve, experienced an almost equal and opposite recovery continuing their momentum from prior years. See also the impressive long-term results of these tech giants, attributing a great deal of performance during the bull market run.
2019 Economic Outlook
The global economy continues to expand, though there is an expected deceleration of growth, both domestically and abroad. US inflation is trending higher, but we maintain our belief that it (as of yet) does not represent a problem for continued economic expansion. Outside the US, inflation simply is not a problem, due to slow growth and (currently) low oil prices.
In the US, the impact of tax and regulatory reform are beginning to taper off, and the government shutdown could diminish Q1 economic growth if it were to begin again in February. US GDP continues to grow, albeit slower than last quarter, and solid earnings and revenue growth, make for a generally positive market environment. We believe the existing bull market will continue (caveat: until it doesn’t). However, decelerating earnings growth and rising interest rates will most likely combine to push valuations down and volatility up. Market volatility will also be affected by what seems to be a continuing series of geopolitical events, specifically ongoing trade tensions between the US and China, Brexit, the Italian fiscal discussions, and changing political climates in France and Germany.
Developed and Emerging International stock valuations continue to be attractive relative to US valuations. But as true in the US, investors must accept increased volatility in the international markets. US investors in non-US markets may benefit in 2019 from a generally stable or only modestly increasing dollar.
The US yield curve remains incredibly flat as lower longer-term expected growth rates and technical investment flows combine with only modest inflation expectations on the long-end of the curve, but we believe the risk of inversion is low. Currently, there is not a great deal of upward pressure on rates, but our consensus view that rates will “grind higher” over the course of 2019, with periodic market corrections and a corresponding “flight to quality” response from investors.