Hope everyone is off to a great start in 2019!
2018 was a bumpy year in the markets. Things really fizzled in late December, which brought a real downdraft moving the markets close to the -20% bear market threshold. This “winter chill” developed on what many considered to be very little compelling economic news or data and the sell-off was arguably exacerbated by tax loss harvesting and low volume.
While these events were hard to watch they also presented a great opportunity for investors to buy key stock indices, targeted equity sectors, and geographic sectors at attractive prices. During this downturn we were opportunistically stepping up our positions in key industry and geographical sectors across all of our clients’ portfolios. We will always use cash to take advantage of large pricing swings in the markets.
Warren Buffett, with his 75 years of investing wisdom has often stated, “Be fearful when others are greedy and greedy when others are fearful.” This statement relates directly to market pricing; when others are greedy, prices typically are higher than they should be. When others are fearful, a good value buying opportunity should be at hand. I am sure Warren and Berkshire Hathaway were buying shares across the board late in December 2018.
Toward the end of 2018 and during the first quarter of 2019 we saw some incredible swings when it comes to the numbers.
Dark December Days
From a September 20, 2018 all-time closing high of 2931, the S&P 500 dropped 19.8% to close at 2351 on Christmas Eve 2018. We are aware of this as we were in the office, and yes, things were grim. As mentioned, the markets in fourth quarter 2018 fell just shy of reaching the -20% threshold that would have made it the 11th bear market for the index since 1946. There have been 10 bear markets for the S&P 500 since 1946. It has taken 26 months on average for the S&P 500 to bounce back from the low point in the previous 10 bear markets and achieve a new closing high.
Comparing 1st Quarter 2019 to 4th Quarter 2018
During the first quarter of 2019 the S&P 500 gained +13% (total return). It would be the best first quarter performance for the stock index since 2012 when the S&P 500 gained +12%. The 2019 performance was only the 5th first quarter in the last 30 years to produce at least a +10% gain. As we are already well under way in April the markets are steadily climbing upwards on the expectations of a trade deal with China, a Fed pause in its tightening cycle, and the Trump Administration not being indicted in the Mueller report.
Bonds – Let’s Talk Rates & Yield Curve (something besides equities, please)
While the equity market has been on a roller coaster over the past 4 quarters, the fundamental credit quality of the average high-grade corporate bond has been very solid. Interest coverage, the ability of a bond issuer to pay interest and principal, continues to be strong, and defaults remain extremely low. Given our background and our clients’ needs, we are a firm that is heavily fixed-income focused. With interest rates finally pushing fixed income yields to an attractive level, we are seeing strong applicability and interest in our individual corporate bond ladders for clients.
The bond market has come a long way in past few years in terms of being accessible to the individual investor in regards to issuance and transparent pricing. Our buy-and-hold strategy of laddered high-grade individual issuers is an efficient way to build a resilient asset class inside a portfolio and achieve a steady, reliable stream of interest income.
What’s this All Mean For My Portfolio?
The end of 2018 reminded us very much of the beginning of 2016 when the market had a violent selloff on no real macro-economic changes. In 2016 we used that opportunity to deploy cash and that has played out well over the past 36 months as prices across most asset classes have had excellent performance and appreciation. While we do see clouds building on the horizon, we like to refer to the old saying that “economists have predicted 17 of the past five recessions.” While the U.S is not in an accelerated growth mode it is, none-the-less, not in recession.
Here are some eye-opening historical facts:
Since 1919 the stock market (S&P 500) has returned just over 10% on an average annual basis.
The Barclays Aggregate Bond Index (AGG) Total Returns:
+ 4.03% over 1 year
+ 1.64% over 3 years
+ 2.42% over 5 years
+ 3.52% over 10 years
+ 3.52% over 15 years
The point being fixed income returns on the the whole have been steady and consistent over past two decades.
Below is a nice snapshot of the largest key market indexes fared over the past decade.
Until the macro data turns considerably worse we will stay vigilant and use market downturns to put money to work at cheaper pricing. We are not a hedge fund or quant shop trading in and out of positions on daily pricing and market discrepancies, but an independent investment advisor firm with a long-term horizon for each investor as well as each of their underlying holdings.
Historical analysis from many of the world’s best economists and investors like Warren Buffett has shown this investment approach to be the most effective for individual investors. Investors need to remember this is a marathon not a sprint, and the patient will be rewarded with meeting their goals. We thank you if you have read the newsletter to the end (great job) and we look forward to any feedback or questions you may have.
We wish everyone a happy and healthy Easter holiday!
-Team Copper River