2018 Year In Review - Extended

My wife asked me earlier this year, “How many different ways can you say the same thing?” She was inferring to “stay the course”. For 31 years, that has been our mantra through good times and in bad. Why? Because we believe it works.

So in an attempt to say the same thing differently, I once read an excerpt from an old rancher stating: “Plentiful water has ruined more livestock operations than any drought.” In other words, staying disciplined during the challenging times builds the foundation for greater wealth during the easier times. We spend most of our time encouraging our clients to adopt this attitude. And during days like the ones we've seen recently, or in the past (2000-2002 and 2008-2009), it pays off.

Our philosophy has been tested for the combined 45 years of experience. While nobody has the proverbial crystal ball, we do believe in the academically tested economic philosophy of how we advise our clients.

Sometimes, Lissa, Wyatt and I feel that we tend to explain more than we probably need to. It’s funny, because I do live by the mantra “less is more” when communicating with others. To that regard, we also track our newsletter readership as well. While we are above “normal” readership from an industry standard, it is still only in the 30% range.

Capital Market update: 2018 was a disappointment. With all the good economic data that typically drives markets higher, it was overshadowed by trade discussions and the Federal Reserve.

From an economic perspective, there was tremendous positive news throughout the year.

  • Tax cuts took full effect

  • Earnings were better than expected

  • Interest rates, while volatile, remained low

  • Unemployment hit a 50 year low

  • Manufacturing levels remain high

  • Consumer confidence continues to be solid

  • Consumer spending remains strong

  • Records were set in retail sales in the fourth quarter

  • Inflation is relatively benign for the year

  • Gross Domestic Product grew faster than expected

However, all of this seemed to be overshadowed by the Federal Reserve and ongoing dialogue between the United States and China.

2019 Outlook: Choppy, since we are still dealing with trade discussions and the Federal Reserve. Does it change our game plan? Simply, no. However, we do invite you to meet with KFM to discuss your personal plan as soon as possible.

For clients that are adding to their portfolios and/or not taking income from their portfolios, the current market environment creates the opportunity to rebalance, possibly buying equities (stocks) as the market is down. For those clients that are taking income, it probably calls for a “reverse” rebalance, where fixed income will be used to fund current distributions versus selling equities in this current market environment.

Predictions of recessions by economists abound. According to the WSJ Survey of Economists, 81% currently believe the economy will slip into recession in 2020-2021. The stated cause for recession is continued tightening of the Federal Reserve and ongoing trade conflicts. Don’t place your bets yet. Comments from CNBC stated on December 28, 2018: “you can rest assured that if all the economists are stating recession in 2020, it will never happen because they are never right”.

Even Warren Buffet has made comments about economists in the past: “I don’t pay any attention to what economists say, frankly. Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No. If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that.” (Source: CNBC 05/22/2018)

Technically, we have had the correction that so many have been waiting for. Perhaps it was even created due to a “self-fulfilling prophecy”.  Stocks have declined at least 20% from their peak in October, 2018.  But look at what the data suggests on market peaks (1) and declines of 10% or more (2). You will find in both instances, after market peaks and after market corrections of 10% or more, the market has been higher 1, 3 and 5 years later.

Market Average Return Subsequent to New Market Highs (1)

1926-2017

Annualized compound returns are computed for the 1-, 3- and 5-year periods subsequent to new market highs. 1,093 observations for 1-year look-ahead. 1,069 observations for 3-year look-ahead, and 1,045 for 5-year look-ahead. 1-year, 3-year, and 5-year periods are overlapping periods. The bar chart shows the average returns for the 1-, 3-, and 5-year period following new market highs. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. There is always a risk that an investor may lose money.    In US Dollars. Values represent the growth of $1 invested at market close 11/30/2017 in the S&P 500 Index (total return), © 2018 S&P Dow Jones indices LLC, a division of S&P Global. All rights reserved. Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Annualized compound returns are computed for the 1-, 3- and 5-year periods subsequent to new market highs. 1,093 observations for 1-year look-ahead. 1,069 observations for 3-year look-ahead, and 1,045 for 5-year look-ahead. 1-year, 3-year, and 5-year periods are overlapping periods. The bar chart shows the average returns for the 1-, 3-, and 5-year period following new market highs. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. There is always a risk that an investor may lose money.

In US Dollars. Values represent the growth of $1 invested at market close 11/30/2017 in the S&P 500 Index (total return), © 2018 S&P Dow Jones indices LLC, a division of S&P Global. All rights reserved. Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Market Average Return Subsequent to Decline of 10% or More (2)

1926-2017

Market decline of 10% is defined as a month in which cumulative return from peak is -10% or lower. Annualized compound returns are computed for the 1-, 3- and 5-year periods subsequent to a market decline of at least 10%. 1,093 observations for 1-year look-ahead. 1,069 observations for 3-year look-ahead, and 1,045 for 5-year look-ahead. 1-year, 3-year, and 5-year periods are overlapping periods. The bar chart shows the average returns for the 1-, 3-, and 5-year period following a market decline of at least 10%. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. There is always a risk that an investor may lose money.    In US Dollars. Values represent the growth of $1 invested at market close 11/30/2017 in the S&P 500 Index (total return), © 2018 S&P Dow Jones indices LLC, a division of S&P Global. All rights reserved. Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Market decline of 10% is defined as a month in which cumulative return from peak is -10% or lower. Annualized compound returns are computed for the 1-, 3- and 5-year periods subsequent to a market decline of at least 10%. 1,093 observations for 1-year look-ahead. 1,069 observations for 3-year look-ahead, and 1,045 for 5-year look-ahead. 1-year, 3-year, and 5-year periods are overlapping periods. The bar chart shows the average returns for the 1-, 3-, and 5-year period following a market decline of at least 10%. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. There is always a risk that an investor may lose money.

In US Dollars. Values represent the growth of $1 invested at market close 11/30/2017 in the S&P 500 Index (total return), © 2018 S&P Dow Jones indices LLC, a division of S&P Global. All rights reserved. Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Trading is now on Autopilot. In the 31 years of practice, I have never witnessed a shortened trading session like Christmas Eve, 2018. Since it now happened once, it would not be prudent for me to say it will never happen again.

Generally speaking, shortened sessions prior or after a major holiday have been uneventful. If the market was not even open, it wouldn’t matter. But the policy of the market is never to be closed more than 24 hours for major Holidays.

Just using Christmas Eve as our example, it would be impossible to discount the impact of “autopilot” on modern day trading. According to data from Tabb Group, computer models and trading algorithms account for 28.7% of the trading. This has more than doubled since 2013. According to the Wall Street Journal, when computers start buying, everyone buys; when they sell, everyone sells (December 26, 2018).

Volatility is something that is only going to increase. This means, calmer behavior must be necessary. We have always stated: Performance equals market returns plus investor behavior. Investor behavior, without question, is going to play an increased role going forward. Since computerized trading has doubled since 2013, one should expect for it to double again over the course of the next 5 years, which will further add to the market volatility going forward.

At the end of the day, you have built a long-term game plan with the assistance of Kemp Financial Management. We have been through the good, the bad, the easy and the difficult. It’s times like this that you may question the wisdom of your long-term plan. You may even be saying “It’s different this time”. It’s not. Stay focused on what matters most. That will guide you through to the finish.

Please feel free to schedule your next update meeting now by contacting Wyatt at 714-257-0800 or clicking here: Schedule My Update Meeting.

We can’t wait to see you in the New Year! We look forward to hearing about all that you have to celebrate in the New Year! Wishing you continued great health, happiness and success in the New Year and beyond.