Monthly Outlook: April 2018 

The first quarter of 2018 was sure volatile but, in the end, there was very little change to the broad market indexes.  By a narrowing margin, the trends remain up, which means we remain invested.  Just like Colorado springtime weather, we’ve seen a lot of wind (volatility), but so far, no storm (new down-trends).  With each burst of nerve-wracking market volatility, it’s natural to feel unsettled and tempted toward rash action.  But the key to investing success is to stay disciplined with a steady, calm, and proven strategy that focuses on long-term trends for guidance.  Our iFolios strategy is just such a strategy and will keep us invested appropriately.

U.S. stocks (S&P500) lost just -1.0% in the 1st quarter of 2018, but it took the long way to get there!  The S&P500 first rose 7.4%, dropped 10.1%, rallied 8.2% again, and then sagged 5.2%.  The key is that it remains above its long-term trendline (200-day moving average) but only by 2.6% so it needs to hold here.  International stocks (FTSE All-world ex-USA) took an equally volatile path to finish down just -0.4% for the first quarter 2018.  It, too, remains narrowly positive, just 2.7% above its trendline.  Bonds (Barclays Aggregate Bond Index) suffered due to rising interest rates and are down -1.6% YTD, including interest.  We continue to favor short-term and investment grade bonds for now.  And lastly, broad commodities and gold are now trending higher.

Looking Deeper into the Indexes

For the past few years, the broad stock market indexes have been trending higher and it’s been an easy time to achieve growth.  We’d like to think the growth was due to our expert jockeying, but the truth is nearly every investment horse has been running well and we’ve just been wise enough stay in the race (stay invested).  And although the broad indexes remain up-trending, just like the past few years, there are some critical differences we’d like to point out.  Unlike the past few years, there are an increasing number of sub-index components that have rolled over to down-trends.  This suggests a bit of increased risk even though it doesn’t show up in the broader indexes.  Let’s look at a partial list of sub-index components:

Uptrending:  5 of 10 sectors including technology, financials and industrials, US Large Growth, Nasdaq, France, U.K., China, short-term bonds, international bonds, gold, the Euro, Apple, Amazon, and Home Depot.

Downtrending:  5 of 10 sectors including consumer staples, healthcare and real estate, US Large Value, Germany, Mexico, Canada, long-term bonds, high-yield bonds, the US Dollar, Citigroup, MMM, and Facebook.

The point is that whereas almost everything was up-trending 2 years ago, it’s becoming a mixed bag today.  In aggregate, the down-trending components have not been enough to “tip” the broader indices to down, but it very may well be coming.  More expert jockeying is becoming necessary to navigate these markets.

Time to Deleverage

One of the benefits of being a money manager is that we get to talk to a lot of people, about a lot of financial concerns.  When we start hearing the same thing over and over, it’s usually worth further consideration and possibly action.  Lately, we are struck by the increasing desire (or need) of many investors to sell off real assets, maybe pay down debt, and free themselves from “cash-sucking” assets that may soon be vulnerable to declining prices, as well.  Weekly, if not daily, we hear of another investor that really needs to sell that second house, that boat, or that “thing” because it’s just sitting there and taking too much cash to keep up, etc.  Given our outlook that financial asset valuations are sky-high, that interest rates are slowly rising, and that we’ve had 10 years of recovery without any kind of correction, we strongly urge investors that hold these idle assets to get them sold this year, before any correction, and before they become less liquid (in a down market).  Get serious about selling them, discount the price a little if needed, but get ahead of the curve.  If you don’t need to sell them or just don’t want to, that’s fine; hold them.  The fact that we hear this issue so often, lately, tells us there are lots of investors in the same boat (or second house).  If this applies to you, either get motivated or settle in.