Where The Pain Was Felt The First Half Of 2018
The first half of the year presented investors with some real challenges. If you are not familiar with the Resilient Investing philosophy, we do not forecast or make predictions of any type. Forecasting is a game that can't be won. We simply observe market outcomes to see if our system for long-term investment results is still working as designed.
1Q and 2Q gave us the WORST:
German Banks At Lowest Since 1988
Onshore Yuan Worst Quarter Since 1994
Argentine Peso Worst Start To A Year Since 2002
US Financial Conditions Tightened The Most To Start A Year Since 2002
Global Systemically Important Banks Worst Start To A Year Since 2008
Global Stocks Worst Start To A Year Since 2010
China Stocks Worst Start To A Year Since 2010
German Stocks Worst Start (In USD Terms) Since 2010
Global Economic Data Disappointments Worst Since 2012
Emerging Markets, Gold, Silver Worst Start To A Year Since 2013
High Yield Bonds Worst Start To A Year Since 2013
Offshore Yuan Worst Month Since Aug 2015
Global Bonds Worst Start To A Year Since 2015
Treasury Yield Curve Down Record 16 Of Last 18 Quarters
Source: ZeroHedge (Link)
Major Indexes:
For financial advisors and investors, there were outsized returns in Growth. There was pain to be found if you were allocated exclusively to Value stocks. For those who are old enough to have been a market participant in the late 1990's, this disparity between Growth & Value looks familiar.
Source: Morningstar
US Sectors:
The Technology & Consumer Cyclicals sectors drove the markets overall performance. At this stage in the market cycle, it seems like investors would be taking an outsized risk by over-allocating to these sectors.
As a reminder, the Consumer Cyclical sector includes most restaurants, apparel companies, auto parts retailers, entertainment companies, home improvement retailers.
Fixed Income:
There has been significant pain in the fixed income markets this year. I think it is worth noting that TIPS have performed as designed.
Source: Morningstar
Over the past few months I have had many conversations with advisors about how to best allocate to this sector. None of the options are particularly appealing if you are diligently managing a portfolio.
Mutual Funds - The structure of a mutual fund and the perverse incentives of the management team create a conflict.
Individual Bonds - Are you able to get access to the best bonds and if so, are you getting a competitive bid/ask?
Traditional Fixed Income ETFs - Note the performance of the indexes above.
Defined Maturity ETFs - They have not been tested in a rising rate environment. Are you going to allow your capital to be at risk as these vehicles go through their first test?
One fixed income theme that continues to be brought to my attention is the concept of using Dividend Paying Stocks for a fixed income allocation. When this idea is presented by a financial advisor I question their ability to think rationally. A stock is not a bond in the same way a chicken is not a motorcycle. Looking at the Schwab US Dividend ETF (SCHD), it is down 3.67% YTD.
One item of note for fixed income investors is the ability to finally get "some" yield in short term US Treasuries. Looking at Schwab's BondSource offerings at the end of the quarter, it looks like a 6-24 month ladder could provide some opportunities to protect capital in this asset class.
Commodities:
Allocating to commodities is always a challenge. I have covered this on podcasts with hedge fund manager John Farley (Link) and Will Rhind who is the CEO of GraniteShares (Link). In the first half of the year a long-only index could have provided inflation protection. Please use extreme diligence allocation to this space.
Source: Morningstar
Observations On The Current P/E Ratio:
The old saying, "There are lies, damn lies and statistics" could be reworded to "There are lies, damn lies, statistics and P/E multiples." The current 'As reported' P/E for the S&P 500 is 24.74. By historical standards that is high.
Since I firmly believe that only fools make market predictions, lets look at it through a historical lens. In both the late 1990's and just before the 2008 collapse the market reached the same level as where we sit today. The P/E multiple also expanded from here as well. We don't know what is going to happen from here. I would recommend not listening to anyone who tells you that they know what will happen from here.
Source: www.multpl.com & Jay Coulter
The second half of 2018 should be really fun to observe. In my experience and through extensive research, I can tell you that a diligently allocated portfolio that is customized to your risk tolerance and goals is the only way to navigate these markets.
If you would like to be connected with an experienced financial advisor that can help you build a custom portfolio and financial plan, let's schedule a time to talk and I will provide you with a couple of recommendations. (Click Here)
About Jay
I am an investment strategist, practice management consultant & author. I also the host The Resilient Advisor Podcast. My next book, Resilient Investing, is due to release in 2018. I hold an M.B.A. from the Goizueta Business School at Emory University and a B.S. in Business Management from The University of Tennessee. Additionally, I earned the Certified Investment Management Analyst® and Certified Financial Planner® designations.
