2018 was quite the wild ride. The worst year in 10 years. 2019 is the best January since 1987, the year I graduated from Texas A&M. What’s going on?
Hello, my name is Paul Carroll. I’m the CEO and founder of Efficient Wealth Management.
In 2018, the wild ride took us first on a down slope with international stocks. Then we saw interest rates going up, coming back down, resulting in varying degrees of bond volatility. We had a strong dollar. It didn’t matter what you did. Whenever you have a strong dollar, you herd commodities, you make it difficult for foreign countries to buy your raw material, you improve imports, you reduce exports, and no political agenda can change that reality. And finally the yield curve. It kept promising to go inverted. It got very flat. A five year bond and a 30 year bond paid almost the same rate, but it didn’t go inverted, and it still hasn’t quite yet.
As the year progressed, we saw increasing tracking error. And what that means is what real people saw in their portfolio was now what they saw on the headline news, and the reason before that is because the S&P 500 was being driven by the FAANGs. Facebook, Apple, Amazon, Netflix, and Google. Until finally towards the end of the year the impossibility of the multiples that these FAANGs were being driven by came home to roost. And December became dreadful, minus nine percent. It’s interesting what a difference a month makes because despite such a gloomy, pessimistic, difficult to understand year, January was the best we’ve seen since 1987. In fact, 80 percent of the time you have a strong January, you have a good year. There’s not a guarantee, but it’s a pretty strong in indication that 2019 is not going to be that bad. In fact, the SNP was up 7.9 percent recovery, almost all of its losses from December.
So what do we learn from all of this? First and foremost, if ever there was an example of the impossibility of timing markets, this was it. Anybody who stepped off the tracks in December locked in their losses to the tune of nine percent. In January, not only did the S&P do well, but mid-caps and small-caps did even better. So what do you do? You maintain an intelligent tax efficient asset allocation. You buy low and sell high. What do I mean by that? You invest into the asset classes that are most out of favor and for those who are dispersing that portfolios in retirement, you sell those asset classes that are most in favor, that have done the best in the last year. 2019 is probably going to be a lot less exciting than 2018. That’s a good thing. We wish you the best of investing success.
Domm, Patti. “The Best January in 30 Years Could Mean Good Things for the Stock Market in 2019.” CNBC, CNBC, 31 Jan. 2019, www.cnbc.com/2019/01/31/the-best-january-in-30-years-could-mean-good-things-for-the-stock-market-in-2019.html.
Isidore, Chris. “2018 Was the Worst for Stocks in 10 Years.” CNN, Cable News Network, 31 Dec. 2018, www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html.