What a year it has been. Riding the wave of 2017 – a year where we saw the strongest corporate earnings ever recorded along with strong financial indicators across nearly all sectors and industries – we started 2018 with tax reform. The reform offered corporations further flexibility in their cash flow and an increase in their earnings. We were told tales of Apple and other corporations bringing back overseas cash which, in turn, would result in the creation of new jobs and further earnings growth. Though the money came back and earnings growth did, nominally, increase – this year has not proven to be as fruitful for the stock market or the general economy’s wellbeing as previously assumed.
The excitement for tax reform initially resulted in the broad market reaching unreasonable and unsustainable highs in a very short period of time. Only to result in a correction in price – a short-term but effective rebalancing of prices in the markets – where all gains that occurred in January were wiped out. Thereafter, from April through October, we saw a stable and consistent push back up to new highs. We regained our confidence in the market during this period and began allocating any available cash to US based investments with hopes of having a great returning 2018.
Global markets often trend in the same direction as US markets – however, we recognized systemic weakness in Europe, China and Emerging Markets after January’s pull back. While U.S. stocks regained their climb higher, global markets were no longer participating. We decided to decrease exposure and, ultimately, exited international markets at which time we began reallocating to U.S.-based investments only.
In our Price vs. Time correction post in March, we defined the state of the market at the time as a “time correction,” however, with the market’s extensive swings starting in October it became evident that we were entering a price correction and we could, in fact, begin seeing prices go lower and lower.
We can point to trade wars which pushed inflation higher and corporate profits lower, Fed rate hikes, continued political scandals and a whole array of other systemic “issues” – the moral of the story is really quite simple: the narrative has changed about the state of the US economy. One of my favorite sayings exemplifies what we’re seeing happen quite well, “Where perception goes, energy flows.” Regardless of the fundamental indicators we’re still seeing as positive, the market is going lower because the systemic perception is that it should, in fact, go down.
Credit markets are often considered a “leading indicator” – meaning, whatever the credit markets do, the rest of the world soon follows – it is, coincidentally, the largest market in the world so it should certainly be a point of interest to all investors. Over the last few months we have seen a significant change in credit market’s trend… It quickly, and sharply, began trending down due to its inverse relationship to rising inflation and the prospect of rate hikes (which were just confirmed on Wednesday). This, of course, caught our attention and was a large reason we began moving to a defensive outlook on the market.
It’s often said that “cash is king” but many forget that it really can be. Not all the time – very few times, in fact – but cash does serve a great purpose. Which is why we slowly began moving away from investments and into cash over the last two months. And, most recently – just this last week we began exiting the market almost in its entirety.
Our role as your asset managers is to protect the money you have worked hard to save and invest for your future. We understand that getting whipsawed around creates opportunity costs, transaction costs, tax implications and all sort of headaches – it’s part of the deal we make by investing – but in order to avoid being stuck riding a bear market to what could be another recession, or more importantly, finding ourselves in a position where we NEED to sell rather than WANTING to – we have to take the necessary precautions so that we make our way out with only minor cuts and bruises.
Similarly, as there were signs telling us to be fully invested in 2016 through 2017 to ride the wave of new highs – there are now signs telling us to move into cash and protect all that we’ve gained through our efforts.
As for now, we want to wish you a very merry holiday season filled with love and adventure. We hope the New Year ushers in new beginnings and fruitful opportunities!
We’ll keep our eye on things and give you an update on next steps in the new year as we wait to see how things evolve and, hopefully, settle down. Thank you for your ongoing trust and support – we are so grateful to have such a wonderful group of clients and friends.
By Mark Sauer
Contributions by Christian Carreon
