5 AM Alarm

January 12, 2019

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As I have aged, it seems my alarm clock goes off earlier and earlier. As a child, I somewhat dreaded waking up early in the morning unless it involved golf or some other sporting activity. Early morning Bible studies were thrown in the mix as I entered college. I have many older mentors to thank for motivating me to get up early and study the Bible. As I started my career, an earlier wake-up was the norm. Of course, once kids came along, the alarm clock was somewhat useless as babies became the new alarm clock (which went off multiple times every night). More recently, I have picked back up the hobby of running. With a busy family and work life, early mornings are the best time to “get my run in”. I have come to enjoy the solitude and peace of the early morning.

Similarly, one can think of the cyclicality of financial markets as a quasi-alarm clock. Markets move in cycles, but predicting the major turns in markets is difficult, if almost impossible. Let’s take global stocks markets for example (see below). A time of 5 AM can represent a “market top”. If an investor was attempting to capitalize on the S&P 500 Index, he would be a seller in early 2000, late 2007, and the middle of 2018. Hindsight is certainly 20/20 in all these cases. While I do not advocate market timing, I believe investors can position portfolios in ways to combat the negative effects of major downturns in markets. I would much rather position a portfolio for more safety earlier rather than later. If that means my alarm goes off at 3 AM, instead of 5 AM, I’m a happy camper. I’d much rather be up early than sleep in and suffer the consequences.

2018 Markets in Review

2018 was a rough year for financial markets. In 2018, 90% of asset classes had negative returns! This the largest such percentage since 1901 according to DoubleLine. All major stock market indices were in the red. Many real assets such as commodities and real estate were also down in 2018. Surprisingly, cash posted one of the best returns last year at 1.9%. Global bonds were mixed. Volatility surged over 100%, while inflation remained benign at 2%.

Stocks

US stocks were the best of the worst in 2018 dropping 4.4%. The more volatile small cap stocks dropped 11%. International stock markets were all down double digits after posting very strong returns in 2017. US Stocks have been the best place for stock investors over the past 10 years as the US economy has been quicker to recover from the 2008/2009 financial crisis. Many market experts including Vanguard, DoubleLine, GMO, Blackrock, and Research Affiliates predict international stocks to rebound relative to US stocks over the next 5-10 years. Another reminder that markets are cyclical.

Bonds

Holding bonds and cash can be very frustrating during booms in stocks. 2018 reminded investors of the benefits of holding bonds. Losing less means less time to earn back losses. Global bonds were mostly break-even or down slightly. Cash was king in 2018 up 1.9%. Municipal bonds held up nicely thanks to a strong second half of the year.

Balanced Portfolios

A balanced portfolio of 60% global stocks and 40% global bonds were down 6.1% in 2018. Last year was a fresh reminder that balance is healthy for portfolios after many years of gains in stocks.

Real Assets/Other

Real assets such as real estate, energy MLPs and commodities suffered losses in 2018. Hedge funds were also down in 2018. As expected, gold was a good place to be during the 4th quarter as risk assets were down. Volatility was up over 100% last year, another reminder that markets carry risk. Inflation remains low and US home prices continue to show positive returns.

References

DISCLOSURES & INDEX DESCRIPTIONS

For disclosures and index definitions please click here.

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