Market Update

The fourth quarter of 2018 continues to be a volatile season for the markets. Since this has been such an ‘interesting’ week, we wanted to give you a brief update on current issues we are monitoring as it pertains to both equities and fixed income.

It’s difficult to identify a singular cause for recent volatility.

Many pundits point to fears over a trade war with China, as President Trump and Chinese President Xi are set to square off over a potential long-term trade agreement. President Trump has threatened more tariffs if a trade deal cannot be reached. The markets have reacted as if it believes him. The question is whether Xi believes him.[1]

Today, a weaker-than-expected jobs report was released. November saw 155,000 jobs created, a figure that fell well below economists’ estimates of 190,000. However, the unemployment rate remained at a relatively healthy 3.7%.[2]

The Federal Reserve will conduct their December meetings on the 17th and 18th. Recent signals suggest there is a high likelihood they will raise the Federal Funds Rate another .25%, holding fast to their strategy to ‘normalize’ interest rates. As interest rates increase, bonds suffer, especially those with longer durations. This is why we target bond positions with comparatively shorter durations in this current environment. As rates rise, cost of capital also increases, which ultimately drags corporate earnings downward. Many project that given recent economic fears, the Fed’s rising-rate tactics may cool in 2019.[3]

And then there are those who simply believe a correction has been long overdue. 2017 was a record year for low volatility. Of the 56 lowest closing levels in the history of the VIX (which measures volatility), 47 of them occurred in 2017[4]. Last year was a historically smooth ride. Many believe a rough 2018 was bound to happen.

There is no doubt 2018 has been volatile. Interestingly, only 5 calendar years in the last 70 years have seen US Stocks and Bonds have returns BOTH below 4%. If the year ended today, 2018 would be the 6th. 5

Side note: the year following each of those 5 years saw positive returns in both stocks and bonds, the average being a double-digit-plus increase in stock prices. Whether 2019 provides a similar bounce-back remains to be seen. 5

As our investors know, we invest according to price momentum. One tenant of our investment philosophy is to move to the sidelines when appropriate. We utilize our 10/50 Weekly indicator to provide an objective exit and re-entrance strategy. Note the S&P 500 chart below:

You’ll note that the 10 Week Price Average price (green line) is getting very close to crossing below the 50 Week Price Average (the red line). Should this happen, and if a cross-down confirms the following week, we will exit our equity positions until a positive long-term trend reestablishes. We will let you know if an exit occurs.

If you have any questions about this strategy, please do not hesitate to contact us. We would love to tell you more about our investment philosophy, and why we believe in it. We can also discuss alternative investments that are not directly correlated to stock market prices which might be suitable for a portion of certain investor’s portfolios.

We hope you enjoy a great weekend and a blessed Christmas Season,




[1] https://www.washingtonpost.com/opinions/china-tried-to-strike-at-trump--and-missed-the-mark-entirely/2018/12/06/f1c35532-f984-11e8-8d64-4e79db33382f_story.html?utm_term=.05a926ccb58a

[2] https://www.nytimes.com/2018/12/07/business/economy/jobs-report.html
[3] https://www.marketwatch.com/story/fed-still-likely-to-raise-interest-rates-in-december-economists-say-even-as-stock-market-gyrates-2018-12-06
5 Morningstar as of 12/4/18. Stock market represented by S&P 500. Past performance does not guarantee or indicate future results. Stocks represented by the IA US Large Cap TR Index and US Bonds by the IA US IT Gov Bond Tr Index.
Posted by Jeri on 12/7/2018 3:31:51 PM

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