Broker Check

2018 4th Quarter Summary

Bullslaughter on the Orient Express

 

By:  James C. Denton, CFP®, Managing Partner


January 2, 2019

 

Bull markets do not die of old age.  They are killed, usually by an unforeseen but identifiable specific event or circumstances.  This one seems to be the target of a determined conspiracy.  The suspects are numerous … the Fed, the Democrats in the new congress, the Republicans in the old congress, the media, the president and his tariffs, trade wars, tweets and toots, or market participants, themselves.  My opinion, it’s a “Murder on the Orient Express” event.  Everybody is complicit if not guilty, some more than others.

 

Yet there is hope, perhaps even the likelihood that the victim will survive.  You may have noticed that most of the suspected perps are political rather than economic.  The most common cause of death for a bull market is recession, and there is no sign of a recession in sight.  I can’t say with certainty, but I doubt there has ever been a recession coexistent with full employment, and we are at or above full employment by any measure.  Corporate profits remain comfortably above historic norms as well, and consumers are consuming. 

 

There is some concern about rising Interest rates, but rates currently are nowhere near high enough to choke off growth.  On the contrary, interest rates remain low by historic norms.  Economic growth remains substantially above that of the past 10 years with no sign of anything worse than a regression to the mean.  Finally, inflation, the expected downside risk of full employment and the reason the Federal Reserve increases rates in a hot economy, remains tame, indeed below the fed’s desired target rate of 2%.  Some are predicting a recession in 2020, but the prediction seems to be based on a fear that “it’s just time for a recession”.  A recession is two consecutive quarters of negative economic growth, the last one ended in 2009, and there are few if any empirical indicators that one is in the offing.[1] 

 

Indicators notwithstanding, this has been the worst December since the great depression (1931), and the worst quarter since Q1, 2009.  All in all, it appears to me as a classic over-reaction to a short-term over-valued condition.  Whatever the cause, the market is throwing a prodigious hissy-fit, in a bad mood, looking for any reason to act out, interpreting all news in the worst possible light, and unable to sustain any kind of rally when the news is good.

 

But what is the real impact?  How much does it really matter?  While somewhat cautious on the immediate future, I continue to believe in the longer-term prospects of our economy, and more importantly, about the prospects of the specific stocks we own.  While current trends can be a powerful indicator, and one aspect informing our investment decisions, the fundamentals are at least equally important if not more so.  Profitability, stability, growth prospects, the current price compared to various other metrics (earnings, sales, book value, etc.) management, products and markets.  There are many variables which go into deciding whether to invest in a given company, and I have to say, while we have a laggard or two in our portfolio, I feel pretty good about just about all the companies we presently own.

 

Short-term market activity, either positive or negative, really means very little unless you have to sell into it.  If you have a long-term strategy, the day-to-day ups and downs really don’t mean much.  Example:  the market was down > 600 points the day before Christmas; up >1050 points the day after.  This extreme volatility, while disconcerting to all, presents opportunities and we have done our best to exploit them insofar as we are able.  Good companies meeting all the parameters discussed above are on sale at discounted prices regardless of your benchmarks.  All three indices bottomed (so far) on Christmas Eve, at 20% below the record highs set in September, and many very good companies are even lower.  If you liked Amazon.com at $2,000, Apple at $230, Boeing Aircraft at $390, J&J at $145, JP Morgan Chase at $119, you’ve got to love them at 25% off. 

 

Here’s your take away … We are well positioned for the recovery when it comes, and it will surely come.  If you go back and read my earlier newsletters, you will find I have consistently told you that this day was coming.  Every now and then the Piper shows up with his hand out.  I just didn’t know when.  Volatility and short-term uncertainty such as you are feeling right now are the costs of the very satisfying long-term gains you experience from the stock market when compared to other investment opportunities.  While I can’t promise that it won’t get worse before it gets better, I can tell you with a high degree of confidence that this too shall pass.


[1] Interestingly Australia has not had a recession since 1991, 27 years ago, so our 10 years is far from a record.

 

The observations and opinions expressed in this commentary are those of the author and do not necessarily reflect the views of Kestra Advisory Services, LLC or Kestra Investment Services, LLC. This commentary is for general information only and is not intended to provide specific advice or recommendations for any individual. You should discuss any investment decisions with your financial advisor. Income Tax services provided by DFS Advisors, LLC are conducted as an outside business activity separate and distinct from our relationship with the Kestra companies. Kestra Advisory Services, LLC and Kestra Investment Services, LLC do not provide tax advice or services.