While many investors are simply glad 2018 is behind them, that does not mean all which ails the markets is behind us too. There is plenty more downside coming for stocks due to some U.S. economic issues here, as well as the greater global economic issues, which are impacting companies here in the U.S. Growth continues it's glide path downward and there is more to come.
As of Late:
2018 is now in the history books but for many investors the impact it may have on their wallet will be felt for a good while (and "it's not over till it is over!") so don't breathe sigh of relief just yet.
To get a bit of perspective on what happened I have included a couple of my favorites, graphs to show what the latter part of 2018 actually looked like. After we glance at a few of these we will talk about the "whys" of what happened.
For starters we will simply begin our review of December, 2018. To do so, let's jump back 90 days to the opening of the markets in October, things were looking worrisome from many of the indicators we watch. At that point, after the historically long "bull market" we have seen over the years, it seems some people just could not admit that there could possibly be an end to the nine (9) year long bull market.
The S&P had it's first losing year since 2008 and that year was a big loser, falling more than -37%! A loss like that makes the loses of 2018 seem really almost tolerable.
The struggle is that the lessor loses of 2018 came so quickly while after many investors remained over confident in the aging bull market. They were somewhat stunned when the market pull backs didn't bounce back up; they just seemed to keep pulling down. To that, we urge you to remember a couple of oft quoted phrases. "All good things must come to an end" and "Markets always lose money faster than they make it".
In all fairness, what happened in December, as shown in the graph above, was simply a continuation of what began in October. So yes, the two graphs (below and above) have the same basic trajectory within them; down and down. As has been witnessed within the structure of life, strength begets strength and weakness begets weakness. Weakness is here currently for stocks and most indicators show a clear picture of weakness continuing for the short and intermediate term future. CRA considers short term to be less than three (3) weeks and intermediate term to be from three (3) weeks to three (3) months.
What is causing the majority of this? A few different things are lined up as the major contributors. First we are at the end of a very long party. It's been a decade and it's been fun but all good things MUST come to an end. Much of the buying which has been going on as of late is on large amounts of borrowed money. You can't outrun the borrowed money train forever. I am not really trying to be philosophical at this point in time but it's true of this party coming to an end. Corporate profits have stopped going up as of the 3Q of 2018. They were up 9 calendar quarters in a row and though they are not going to be falling off of a cliff, they are going to be diminishing.
A few months ago I mentioned in our newsletter a concept known as the "rate of change". A drop in the rate of change does not mean everything is going negative but it does mean things are not going up and there is a decline occurring. In many cycles during life, if we are not aware of the rate of change slowing, it creates problems and they can be somewhat large problems. So, if we were to actually wait until corporate profits were indeed negative and we were not observant of the rate of change slowing, we would miss the largest portion of the movement here and come up very short in our management expectations and executions.
So, first is profits are slowing. Secondly we see that economies around the world are continually slowing quite noticeably and this is also showing up in their stock markets. Their economies slowing means they are already buying fewer goods and services from other countries including the U.S. This has nothing to do with tariffs, nothing at all. It has to do with countries around the world taking on too much debt over multiple years and now they have to slow it down/stop it. We also mentioned this in a recent newsletter as well. When a country is as big as the U.S. and sells as many goods and services as we do around the world, if lots of countries begin to buy less, it hurts and it is currently hurting them and is hitting the U.S. as well.
This graph below is a perfect example of a huge slowing in the rate of change for Chinese GDP. The world's second largest economy is slowing more and more, year over year. Until 2010, the rate of change was hugely positive and basically since then, China has been headed into the tank.
Recently I had lunch with one of our CRA clients who returned from a business trip to China not long ago. His perspective on things was quite candid and focused. He talked of riding through large cities with new residential buildings ready for occupancy but no one in them. No one was moving in. Perfectly well landscaped but no people around, no moving trucks, nothing. These condos, town homes & apartments, all built on speculation and then purchased as an investment but no occupants. "Somebody is not paying their bills Ken", is what he quipped to me. This is a known issue for the past many years and the problem still lingers.
Global car sales have stalled. Car sales have been slowing but now we see many of the incentives dealers and manufacturers are offering to potential buyers have not sufficiently revved up the car sales machine. It is becoming more worrisome and layoffs are occurring globally, not simply in the U.S.
So with all the headwinds blowing against economies, growth slowing, too much governmental debt, international trading partners buying less, car sales slipping slowly back, is anything in the investment world working? There is! In stocks, utility stocks are staying strong and stable. We bought utility portfolios back in mid July. Also, longer term U.S. Government Bonds have done well over the last 100 days or so and we have owned them the entire time frame. Also, investments in the U.S. Dollar have been relatively strong against the falling broad U.S. stock markets.
These types of holdings, utilities, U.S. Government Bonds, the U.S. Dollar and money markets helped our clients not lose money in the percentages that the S&P 500 and other indexes have. While some of our clients have experienced some gains during this time we also have had smaller, 3%-5% loses. These are quite small versus the 12% - 20% loses the U.S. stock indexes have incurred. We do continue to work diligently to be defensive and cautious today while looking for other opportunities in other areas across global markets.
We remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Many people believe interest rates are rising. They are NOT rising. They did but they are coming back down quickly. Mortgage rates seem to be dropping down as of late.
So, if we look at all of 2018, we can see below that there were basically no areas or sectors of the U.S. markets which made money. All of them for the full year showed losses except for one. CASH/MONEY MARKETS. For the full year, CASH/Money Markets are the only asset class which made money and no one that we are aware of forecast this to be so at the beginning of 2018.
This is why it is so advisable to be diligent about watching so many different elements of the markets! A year ago no one knew what would happen and yet as the months rolled out, research can show where markets are weak and where strength is beginning to come into markets!
This chart below comes to us with permission from a great researcher, Charlie Bilello and he always seems to do pretty work. Thanks Charlie for your creativeness.
Speaking of forecasting. If you recall this time last year there was all the rage going on about crypto currencies and this thing called "Bitcoin" which is one of the many crypto currencies in existence. It seems this time last year anyone who had any bitcoin acted like they had already made their millions by owning it. One person, who is not the primary bread winner in their home came to me and said they were going to start taking ALL of their commission checks and begin investing them into bitcoin. I tried hard to walk this person through many of the aspects of doing such a thing with ANY asset class and particularly with something they seemed to know so little about. Today I am so glad they listened.
Below shows the returns for many types of crypto currencies for the full year of 2018. It seems 2018 was not the banner year many had hoped for investing in crypto currencies. The losses in crypto currencies have been nothing short of staggering. Again, this chart below comes to us via Charlie Bilello. Our thanks to him again.
We currently have holdings for our clients based on the following in the six models we use most:
Small Cap Index/Russell 2000. This holding was sold in very early October and this model is 100% in money market.
S&P 500 Index
SMid Cap Growth Index This was sold in early October and is 100% in money market.
Electronics Sector Index This was sold in late September and is 100% in money market.
Real Estate Sector Index This was sold in early October and is 100% in money market
Utilities - Our newest Position
Japan Nikkei 225 Index Sold and in money market now.
Long U.S. Dollar
High Yield Bond Inverse Position
High Yield Bond Index
Long-Term U.S. Government Bond Index
High Yield Tax-Free Municipal Index -Our most recent reallocation.
U. S. Government Long Term Bond Index