Do not go gentle into that good night, Old age should burn and rave at close of day; Rage, rage, against the dying of the light. – Dylan Thomas
The year 2018 certainly did not go gently. The Dow Jones Industrial Average (an index consisting of 30 blue chip stocks) posted a record-breaking Christmas Eve Loss, shedding 653 points, or 2.9%, during a shortened trading day. This loss eclipsed the previous record set on Christmas Eve 1918. Then, after Christmas festivities subsided and the market got back to business on the 26th, the Dow rallied by gaining 1,086 points or 4.98%, marking the single most significant point gain for the index ever and the largest percentage gain since March 23, 2009, when it rose 5.8% in a single day.
This explosive ending seems fitting for a year we will remember for returning volatility. After a steady rise in January of 2018, markets began to crack in February. CNBC ran a headline on April 2nd proclaiming “stocks post worst start to April since the Great Depression.” During the ensuing months, stocks remained volatile, but many U.S. stock indices managed slightly positive returns by the end of the second quarter. The third quarter was off to the races, with a touch of euphoria setting in during September. Then, at the end of September, with concerns over trade, earnings, and Fed action settling in, the markets began to fall. We started our fourth quarter commentary with a cautionary tale of facing a bear. The moral of the story was when facing a bear, you should always stand firm, resolute in your strategy. If you panic and run, the bear will surely catch you. Indeed, at the lows on Christmas Eve, the Standard and Poor’s 500 (an index consisting of the 500 largest U.S. publicly traded companies) closed closer to a bear market than it has since the Great Recession 10 years ago, falling 19.8% from its high (0.2% away from a 20% decline). Most other U.S. stock indices broke the 20% barrier, with the Russell 2000 (a measure of small companies) falling 27.2% and the tech-heavy NASDAQ falling 23.6%.
Bear markets, while normal and healthy, do not occur frequently. A bear market is somewhat arbitrarily defined as a drop in stock prices of 20% or more. Market corrections of at least 10% are relatively common and have occurred every 1.86 years since 1950. Bear markets have been considerably rarer. Since 1975 there have only been five corrections of 20% or more; if we count this as one, it makes six. Why did we see this steep decline, when the economy is strong with low unemployment, robust GDP growth, and still accommodative interest rates? The trade war with China is the most often cited market pressure for 2018. Tariffs on steel and aluminum hit the auto industry and appliance makers hard, but it is also beginning to affect smaller businesses. Since we’re talking about the two largest countries in the world as measured by gross domestic product (GDP), any disruption caused by this trade war could have worldwide impact. The flattening of the yield curve has also gained notoriety in recent months. Because the Federal Reserve (Fed) raised short term interest rates, we have not seen a corresponding rise in long-term rates. This disparity resulted in the yield curve flattening. Historically, if short term rates (measured by the 2-year Treasury) pass long term rates (measured by the 10-year Treasury), a recession occurs in the following two years. The specter of continued Fed rates hikes spooked the market over concerns of overtightening and inverting the yield curve. Last but not least, chaos in Washington is giving the market anxiety. As we’ve written in the past, the market hates nothing more than uncertainty and right now Washington is giving us a significant dose of that.
Given all of this, what is an investor to do? There is an old proverb that says, “For bears, winter is only one night.” Unfortunately for investors, the hangover from bear markets seems to last much longer and the sleep is not as good. Fortunately, spring does eventually arrive. Just as bears fatten up before their long winter sleep, following a disciplined approach to investing by focusing on both short- and long-term needs can allow investors to take advantage of bear markets and sleep well at night.
The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.
ph 678.322.3000 / fax 678.322.3059
Persium Group, LLC / 6190 Powers Ferry Road, Suite 500 / Atlanta, GA 30339