To the Investors of International Research Securities:
With the dawn of 24 hour online trading, one could call 2018 the beginning of the Age of Volatility. We have a market characterized by quick recoveries and even faster declines. In the face of this, we are pleased with the decision to employ an active strategy which strives to outpace its passive peers. I am not lost to the fact that the market in general didn’t excite anyone with impressive returns or durable holds like it did in 2017. We need to consider though that of all the ways to see a pull back, a small calculated one such as this is certainly preferable. It’s possible that this correction gave our bull run some breathing room and likely more runway. My prediction for this year… More volatility. Likely record volatility and more rapid fluctuations than previously experienced.
Let’s not sugar coat things. In 2018, the S&P 500 fell 6.2%, and the Dow dropped 5.6%, marking the worst annual performance for both since 2008. Twice this year we have seen significant gains be wiped out by drops. The indices logged their worst monthly declines since February 2009 and their worst December performances since 1931. Markets outside the US were down as well. China’s Shanghai Composite SHCOMP, fell 24.6% in 2018, Japan’s Nikkei 225 Index NIK, fell 12.1%, all for their biggest decline since 2008. The MSCI emerging markets index was down 17%, (worst since 2015).
Is there good news? Yes, if we look at the correlation between the top-performing sector, health care (up 5%), and the worst-performing sector, energy (18.5%) there is a 23.5 point difference. This is well below the long-term average gap of 41 points between top and bottom sectors, stretching back to 1970. Historically, in years following a below-average differential like 2018, the S&P 500 saw a positive full-year total return 91% of the time compared to a positive run only 60% of the time when the spread was above average. With the long term planning we do with our clients, there is never a time to panic, but this historical data is a good shield to use when the news pundits throw their doom to the public for ratings.
More Good News: We are in year three of the election cycle. Going back to 1927 we have had 23 third-year presidencies and 21 of them have posted positive stock market years. It might also interest us that the average return in all 23 of those 3rd years was +16.1%. The past is no perfect predictor of what the future holds as the future is unknown so a diversified strategy is suggested but I find this to be an interesting factor.
Let’s Stay long term: Since we seem to have spent so much time on statistics let me leave you with this. Since 1950, The S&P has had 17,361 trading days 54% of which had positive returns. If you look at it in a monthly timeline, it was up 60% of all months. Of the 272 quarters, 66% have been up and finally, by year, 72% of those years have been positive. Time in the market is significantly more important than timing the market.
As we head into 2019, we invite you to come in. Sit down with us and discuss strategy on a personal level. We are holding strong to the ideals and philosophies that this company has maintained for over three decades. We are always looking for ways to keep fees low, mitigate risk with diversification, and help you achieve your financial goals. We treat every situation as if it was our own money. Your trust in us is an honor, and we are here to serve you. The most flattering compliment we receive is getting a call from your friends or family asking to meet with us based on your endorsement.
Happy New Year!