Monthly Outlook: November 2019

October was another good month for markets and we’re capturing gains! Although the first two days of the month saw the S&P500 drop 3.0%, it ended up gaining 2.0% for the month. International stocks rallied 3.4% partly because the Euro gained 2.2% against the Dollar. Bonds added just 0.3% for the month. All in all, it was a solid month.

As we move into the final two months of 2019, it’s worth noting that every single asset class is back to an uptrend, meaning they are above their 200-day moving average. Uptrends are when we make money so we’re very optimistic. But we’ve seen this flip-flop several times this year. Remember that stocks were up in April, but down in May, up in June, but down in August, up in October…and we’ll see. Let’s hope this uptrend lasts this time and we’ll stay invested for growth into year-end. Of course, we’re watching every day and we’ll invest accordingly.

How You Get There Matters

We all know that markets do not move in a straight line. Wouldn’t it be nice to earn 8% year, every year? Managing portfolios requires us to know when to invest for growth and when to be protective. In this year of flip-flops, it’s a good time to remember that when pursuing your investment goals, how you get there matters. Let’s consider two portfolios, A and B. Let’s say that portfolio A has five-year returns of +12%, -25%, +10%, +8%, and +10%.  Portfolio B has five-year returns of +9%, -13%, +7%, +5%, and +7%. Which portfolio would you prefer? Both portfolios have a 5-year average of 3%. Both portfolios have gains in four out of five years. And portfolio A outperformed portfolio B by 3%/year in four out of five years. At first blush, portfolio A looks better, more exciting, and outperforming. But, over these five years, $1,000 in portfolio A would be worth $1,098 and portfolio B would be worth $1,140. Portfolio B wins by a mile! Obviously, how you get there matters! What this really points out is the importance of managing downside. You can lag a little in four out of five years as long as you avoid the big loss, or at least reduce it. Because we haven’t had a big loss in the markets since 2009, it’s easy to forget the risk. But who amongst us really believes there won’t be another big down market at some point? It might be next month, next year, or three years from now. But there will be one and managing it will make all the difference. Of course, you know the setup here is to remind you that our iFolios strategy was specifically created to capture growth and, critically, to reduce downside losses. Over a complete market cycle, usually 7‑12 years, iFolios should do very well.

CEOs vs Consumers

We watch a lot of indicators to analyze the markets, economy, and investment climate, generally. One indicator that we watch is the Confidence Index. Investing is partly emotional and confidence is required. Recently, we’ve noticed an interesting schism between the CEO Confidence Index and the Consumer Confidence Index. Yes, they actually measure this. See Consumers appear to be very confident these days, with an index reading of a bullish 124. A reading >100 has only occurred five times in the past 40 years. Shopping malls, restaurants, and hotels always seem busy every time I travel. On the other hand, the CEO Confidence Index has been steadily declining and is now a bearish 43. Any reading <50 is weak and has only happened five times in the past 40 years.

Intuitively, who do you think has a better handle on the economy and outlook? The CEOs surely do. What do CEOs see that we consumers do not? Similarly, why has the Federal Reserve cut the Fed Funds rate three times now in the past four months? It can’t be purely political; what do they know? When were those five times in the past 40 years that consumers were confident and CEOs were not? They were 1978, 1990, 2000, 2007, and today. And a year later, each time, the U.S. was in a recession and bear market. Will the consumer confidence catch down to CEO confidence? Or are CEOs wrong this time and overly cautious for some other economic or political reasons? It’s going to be interesting to watch. And either way, it’s more important for us to watch price trends of the various markets that we invest in. As we said earlier in this piece, every single asset class is back to an uptrend. We’re in, we’re making money, and we’re watchful.