Monthly Outlook: January 2019
Happy New Year! 2018 was not a particularly good year for global stock markets so we’re happy to be moving forward. International stocks started a new downtrend in May/June due to trade concerns and Brexit and then it rolled over to U.S. stock markets around mid-October. The Grinch came to steal Christmas in December with the S&P500 falling 10% and international stocks losing 5%. It was a weak ending to an already softening year. The good news – that we’ll discuss below – is we’ve been selling stocks for the past six months and are avoiding the bulk of these losses. First, let’s review 2018 market returns.
U.S. stock markets lost 6.1% in 2018, but were flat right up to December 13th. International stock markets fell 14.2% in 2018 and were more steadily down from start to finish. Looking for slightly better news we turn to bonds. Bonds (Barclays Aggregate Index) lost 0.2% for the year, and that includes interest. The star of 2019 was cash (90-day T-Bills) with a 1.7% return. So how did the typical portfolio or growth mutual fund fare in 2018? Let’s look at a typical blended growth-portfolio benchmark comprised of 5% cash, 25% bonds, 42% US stocks and 28% international stocks. This is the benchmark for our iFolios 75 model, by the way. This benchmark lost 6.8% in 2018 and 5.2% in December, alone. We’re proud to report that our composite of iFolios 75 actual portfolios lost only 2.9% YTD and only 0.7% in December! Our tagline, “Growth & Protection” isn’t just marketing; it’s what we do.
Review of 2018 Events
Before we look forward, let’s remember the events of 2018 that have led us to where we are today. Corporate earnings are actually quite good and grew nearly 20%. Unemployment continues to fall and is down to a multi-decade low of only 3.7%. Home prices continued to rise to record highs, although are showing some signs of softening in the last two months. So far, so good, right? Let’s look at the growing concerns. In response to the strong economy, the U.S. Federal Reserve is doing what they should be doing, which is returning the Fed Funds rate back to normal levels by raising the rate ¼% every couple of months. You’ll remember that the Fed Funds rate was stuck at 0% from 2009-2015 after the financial crisis. Today, it’s at 2.5% and rising, which acts like a slow noose around the economic neck. Another potential issue that could stifle continued growth are the actual and threatened trade tariffs on our global trade partners. Nearly every economist agrees that tariffs hurt both sides. Valuation metrics that matter (TMC/GDP, PE10, Margin Debt, ValueLine MAP) all clearly show that stocks are very, very over-valued. This doesn’t mean they have to fall, but it is a risk that should be considered. Politics (both US and abroad) are increasingly volatile, divisive, and unpredictable, to say the least. Lastly, every global stock market, from the U.S. to Germany to China, are all below their 200-day moving average or long-term trendline. As we discussed last month, this only occurs about 25% of the time. While downtrends don’t have to necessarily be bad, they’re never good. Stocks might just be in a small dip or pause phase, that’s true. But big returns cannot mathematically occur until prices move above this trendline. For now, we’ve underweighted stocks in all portfolios, are holding lots of safe cash and bonds, and will wait for uptrends before we re-invest into stocks.
2019 Forecast
You’ve surely noticed the never-ending 2019 market forecasts in magazines and on tv. Forecasts stroke the egos of the pundits and some investors seem to enjoy them, probably when they agree with their own hopes. But the factual history of such forecasts shows they’re terrible on average and not worth much. The world is just too ever-changing and unpredictable. That is why our iFolios strategy is not based on forecasts at all. We simply take a “reading” of each market’s current price trend and invest at either the upper or lower limit of our allocation range. As we start 2019, the price trends of every stock market are down so we’re at the lower limit to provide protection from loss. When (not if, but when) any market resumes an up-trend, we’ll reinvest up to the upper allocation limit. It’s our systematic approach to delivering both growth and protection. Whatever 2019 brings, iFolios will do very well.