First Quarter 2019 Commentary – A Tradition Unlike Any Other

It has often been said that if a Genie should offer to grant you one wish, you should ask where you’re going to die so as to never go there. The simple logic in that remark is that more often it’s worthwhile figuring out what to avoid in pursuit of success.

2018 was a year where investors experienced negative S&P 500 returns for the first time since 2008 and most of the pain was delivered while Saint Nick was packing his sleigh.  In the ten trading days before Christmas, the S&P 500 lost nearly 12% and during the ten trading days after Christmas, the same index was up nearly 10%. As the year turned over, the rally marched on as the S&P 500 returned 8% in January, its best start in more than 30 years en route to posting its best quarterly return in 10 years.

During those painful December days, much airtime was dedicated towards immediate actions necessary to preserve a portfolio. The extremely volatile global markets were a harbinger of things to come, or so it seemed. It was a reminder that an ample supply of market timers guessing when to sell stocks will always exist and the peak of their powers comes during market swoons. “Sell everything now and buy it back in six months” might be good advice for less than one percent of investors – and even that may be overstating things. Time and again this has proven true. The stock market has been positive in nearly 75% of calendar years and the odds of the market being positive over any 10-year period is greater than 90%.  Nobody wants to advocate laziness, but oddly enough, the less you do the better off you will be.

After a record quarter, U.S. stocks are back within whispering distance of all-time highs set last October. The market selloff appears firmly in the rear view mirror. Many investors are left wondering how a decline with that type of velocity and subsequent quick recovery comes to be. You could rattle off theories until you are blue in the face, but attempting to discern a single reason for any market selloff is a futile endeavor – ask five people what happened and you may get twelve different answers. With the benefit of hindsight, the only thing that appears obvious was that stocks were extremely oversold at the end of last year. But to provide context, as far as U.S. stocks have come in the past 90 days, they’re basically flat in the past 15 months, sitting at the same level they were in January 2018. The rally was nice, but we’ve been here before.

In the fourth quarter, non-U.S stocks were a ballast in a choppy environment – international and emerging market stocks held up better than their U.S. counterparts.  That situation reversed itself in the most recent quarter as U.S. stocks outperformed. But even with recent performance withstanding, emerging markets remain well ahead of U.S. stocks over the past six months given their smaller drawdown in the fourth quarter. Diversification isn’t dead quite yet!

Bonds also rallied to start the year thanks to a precipitous decline in interest rates. The benchmark 10-year Treasury fell to 2.41% as of quarter end, down from a multi-year high of 3.25% in November. Taxable and municipal bonds rallied and posted their best quarters in a number of years, both returning about 3%. Following a calendar year where bonds returned virtually nothing, the prayers of bond investors have been answered, if only temporarily. Real Estate, another income-oriented asset class, has steadily attracted investor dollars as real estate yields have become more attractive versus bond yields. Real Estate finished up 14% for the quarter while maintaining its position as the best performing equity sector over the past year.

As the first quarter and March Madness come to a close and the soothing voice of Jim Nantz plugs the Master’s during every break in the action, a golf analogy seems appropriate – the results of the past quarter were akin to a birdie; it was nice, but the 18-hole scorecard is what really matters. It was a great quarter but it’s not indicative of what comes next.

In the investing business, the “what to avoid” is most often extrapolating recent market movements far into the future; which applies to good markets and bad markets alike. Abstaining from market forecasts and not attempting to profit from short-term events is a time-tested recipe. Some people will tell you the trend is your friend, but we’ve never met him.


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