To quote Axl Rose, “All we need is just a little patience.” Or in the case of the fourth quarter, a whole lot of it. The trifecta of weakening global growth from trade tariffs, hawkish statements from the Fed, and government shutdown created a storm so bleak that even Rudolph couldn’t guide Santa’s sleigh to a year-end rally. The December storm took out the February low for the year and found a bottom on Christmas Eve. Many stock indexes fell into Bear Market territory, meaning they dropped more than 20% below their all-time high.1
Volatility was at an extreme low in 2017 and came roaring back into vogue for 2018. It is unknown how long any bear market will last. Looking at past bears since 1946, they tend to have an average length of about 13 months and drop of 30.4% when measuring the S&P 500.2 It is possible to have a bear market in stocks without having a recession in the overall economy. PIMCO’s secular global forum and economic forecast for 2019 coined the term global growth is “Synching Lower”. They call the odds of a recession in the next 12-months a 1-in-3 chance and increase the chances to 1-in-2 for 2020. While this current economic expansion is the longest in history, they don’t die of old age. They tend to die of things like an overheated economy, credit problems, and the economic crises caused by wars and terrorist acts.
This economy still has plenty going for it, GDP is strong, unemployment hovering near a 50-year low at 3.7% while attracting workers back into the labor market, and low energy prices. Fiscal stimulus is also still tailwind for a couple more years. Early January has seen an oversold bounce as stocks likely sold-off more than earnings would suggest at this time. The Fed has back peddled into a bit more dovish tone with how they will run off the balance sheet. Quantitative Easing (QE) has been replaced with Quantitative Tightening (QT). The U.S. versus China trade talks is progressing, though we don’t know to what end. As for the government shutdown, the longest one U.S. history continues to march on and will weigh on GDP going forward.3 We expect 2019 to continue the bumpy ride for investors. Anticipate the markets to rally strongly on any news of a signed agreement between U.S. and China which would reduce or eliminate the trade tariffs. Protection of intellectual property (IP) is what the U.S. is real after in finding an openness to do more business in China. Now that China is creating their own IP, they might want to finally protect it too. They are no longer just the low-wage basement for the world and emerging in many high-tech industries.
So, what does this mean for your portfolio? Well, if you are the type of person afraid of things that go bump in the night, you might want to review your 4Q statement with one eye closed and possibly sitting down. For the first time in years, the intermediate trends we follow have signaled caution ahead. Remember, we follow an 80/20 core and satellite investment philosophy. We intend for 80% of the portfolio to ride out market trends irrespective of the direction, 20% is where we will be more tactical and attempt to capture or moderate intermediate trends. We have reduced our weight in equities by 10% with 5% moving in short-term bonds and 5% moving with cash for our Lithic Advisory Models. Increases in interest rates have made the yield in each of these more compelling and will reduce risk in the portfolios. Remember, we have developed our investment strategies based on your risk tolerance, time horizon, and goals. We don’t recommend changing course just because the markets have changed direction. We do recommend talking with us if your circumstances have changed or you feel uneasy about things.
From a financial planning perspective, make note that retirement plan contribution limits have increased for 2019. IRA contributions are $6,000 under age 50 and $7,000 for 50 and over. The limits for 401k, 403b, and 457 plans increased to $19,000 below age 50 and $25,000 for over.4 Regular and systematic contributions are one of the most fundamental ways to create durable financial wealth for retirement.
Thank you for your continued business and trust. We appreciate the opportunity to assist you in your financial affairs. If you have any concerns or questions, please reach out to us. You can login to our client portal to see the specific returns for your portfolios (https://areniteadvisory.com).
Daniel D. Sands
CFP® | Principal @ Arenite Advisory
17822 E. 17th Street, Suite 212, Tustin, CA 92780
Phone: 949-522-6560 | Toll-Free: 866-330-1443 | Fax: 949-771-9817
California Insurance License #0D95725
Securities offered through Gĕneos Wealth Management, Inc., Member FINRA/SIPC
Advisory services offered through Arenite Advisory®, Registered Investment Advisor
4 https://www.forbes.com/sites/ashleaebeling/2018/11/01/irs-announces-2019-retirement-plan-contribution-limits-for-401ks-and-more/#3f468ec4776c cent 4;\lsd