Monthly Outlook: April 2019
March was another decent month as U.S. stocks added 1.8% and international stocks gained about 1.0%. Bonds were the unlikely star of the month, adding 1.9%, after the U.S. Fed signaled that they were likely done raising rates after their meeting on March 20th. Putting it together, the balanced iFolios 75 benchmark rose 1.2% and we beat that slightly.
The focus should really be on longer term trends, not just month-to-date. From March 2016 to October 2018, stock markets rose steadily. The S&P500 rose from 2,025 to 2,750 over that 3½-year period, a nice gain of 35%. Then the yo-yo started. In mid-October 2018, the S&P500 dipped below 2,750, its 200-day m.a. trendline, for the first time in nearly four years. That’s when we sold for protection. Stocks dropped a stunning 15% for two months, crushing the Christmas spirit. Then, as suddenly as they dropped, they rallied 17% back to 2,750 by Valentine’s Day, 2019. In just four months, the S&P500 made a complete yo-yo as investors cycled through emotions of panic, relief, and mostly confusion. When the yo-yo was over in Feb 2019 and the S&P500 crossed back above its 200-day m.a. trendline, we put positions back on and repositioned portfolios for growth. We effectively stepped across a 15% Grand Canyon and avoided the stress. It didn’t help or hurt returns this time, but it was the right thing to do.
Today, our stock portfolios are 93% invested and we’re leaning heavily into growth mode. But as the Boy Scout motto says, “Be Prepared.” We have tight sell stops in place in case there is more to that Oct-Feb weakness. For example, we’re only 2.7% away from a sell signal on the S&P500. We’re cautiously optimistic, hoping for extended uptrends and growth. But we’re prepared and willing to sell quickly if the trends change for any reason.
Disconnect between Stocks and Bonds
As we start the second quarter, a clear disconnect has developed between markets. Stocks are rebounding on optimism and hope for further growth. Bonds, however, are pricing in slower growth, maybe even a recession. As a result, interest rates have plummeted. It seems illogical that they can both be right. There are plenty of economic indicators pointing to slower global growth. Earnings are at peak levels, though slowing. Home prices, too, are at highs, but slowing. Even the Federal Reserve in mid-March stated that they now predict slowing growth ahead and are on hold for any further interest rate hikes. The 10-year U.S. Treasury bond rate has plummeted from 3.2% in November to just 2.4% today. This has caused the 3-month to 10-year yield curve to invert for the first time since 2007. This yield curve inversion is a widely followed indicator and predictor of a likely recession in the next year or so. But in spite of this data, investors are pushing stocks higher for now. Stock investors seem willing to accept much slower growth as long as they believe global central banks will provide a backstop in the form of accommodative monetary policy. Simply said, the thinking is something like “stocks won’t go down because the Fed has our backs.” Time will tell. For now, we need to stay invested and capture the growth while we have it. As stocks move higher, we’ll keep tight stops in place and remain vigilant for any change in outlook.
3 Simple Rules to Investing
As we’re settling in for growth, it’s a good time to remember our 3 Simple Rules. It’ll help put investing in perspective and to focus on what really matters. Rule #1: Costs matter, so keep them low. Total costs should be 1% or less, all in. Lower costs mean more of the return goes to you. Rule #2: Stock picking to beat the market is really hard. So, our message is, don’t. Use diversified index funds and manage the allocation, instead. 85% of stock-pickers don’t outperform their benchmark according to Standard & Poor’s. Rule #3: Avoid the big loss! This should arguably be Rule #1. If you lose 50%, you need a 100% gain to break even. Our iFolios strategy was developed to answer these 3 simple rules. No major bear market has ever occurred without first crossing below the 200-day m.a. trendline. It can’t, it’s just math. That’s our signal to sell/trim positions and move to protection mode. We’ve built a systematic strategy to avoid the big loss. If you have money that is NOT in an iFolio, right now might be the time to consider your downside plan. Be prepared. Or give us a call – we can help.