2018 Year In Review
2018 YEAR IN REVIEW
- The market remains volatile, but MACROCAST™ continues to indicate a low probability of a sustained, recessionary bear market.
- Weakness in MACROCAST™ is primarily coming from our Technical indicators, as well as some deterioration in our Aggregate Economy indicators.
- Cash was the only major asset class that finished the year in the green. It was the top performer for the first time in 4 decades.
- The market was down more than 10% in the fourth quarter. This has only occurred 19 times in the previous 75 years. More often than not, it did not lead to further weakness.
The Message FROM MACROCAST™
As a reminder, MACROCAST™ is Corbett Road’s proprietary investment model. MACROCAST™ measures the appeal of risk assets by looking at the VITALS of the market—Valuation, Inflation, Technical Analysis, Aggregate Economy, Liquidity, and Sentiment. By looking at multiple factors, we can better gauge market conditions and the probability of a major market decline.
The most recent score for MACROCAST™ matches the lowest reading of 2018, which also occurred in January. Despite the drop, the current score suggests a sustained major market decline is unlikely.
The strongest reading in MACROCAST™ the past few years was in the Aggregate Economy category, which focuses on leading indicators of economic activity. This category is now neutral.
Our Sentiment indicators are positive, thanks to pessimism among investors after stocks fell in the fourth quarter. That may seem counterintuitive, but negative feelings among investors help reset expectations, and stocks do better over the long run when fear is rampant than when market participants are optimistic.
Technicals are weak. Despite the strong start to the year, the S&P 500, Dow Jones Industrial Average, and Nasdaq are still trading below their 200-day moving average trendline (200dma). The market is in an uptrend if it trades above the trendline and in a downtrend if it is below. Volatility also tends to rise when stocks trade below the 200dma.
Forget 2015. 2018 was the real year nothing worked.
At the end of 2015, Bloomberg released an article with the title “The Year Nothing Worked”. It seems they jumped the gun and should have saved that headline for 2018. In any given year, there is generally one asset class that provides standout returns. If it is a great year for stocks, you could expect various equity groups to provide double-digit returns. For example, in 2017, the S&P 500, International Developed, and Emerging Markets all generated returns of 20% or higher.
In a “risk off” year, you could expect gold or long-term treasuries perform well. In 2011, equity markets were flat while the aggregate bond index was up almost 8% and gold’s return was north of 11%.
Not last year. Cash was the only asset class with a positive return, and the 3-month Treasury Bill returned around 2%.
Now, before you go and start stuffing your mattress, note how unusual it is for cash to lead in performance. You have to go back to Reagan’s first term to find a time when cash outperformed as many asset classes as it did last year (chart from Goldman Sachs):
*The above chart should read 2018 not 2019
Asset Class Review
Some additional insights:
- Bonds provided no gains. When the market performs poorly, bonds often outperform, offsetting that weakness. For instance, in 2011 the S&P 500 finished flat, while the aggregate bond index was up almost 8%. 2018 provided no such comfort, as the Agg Bond Index finished flat. However, it is important to note that bonds handily outperformed stocks during the market sell off last quarter. This shows they still provide protection against volatility even without positive returns.
- Emerging markets went to the back of the pack. Emerging markets went from first to worst from 2017 to 2018. Notably, the asset class outperformed US equities in the 4th quarter sell off—a good reminder that emerging market stocks remain among the most volatile asset classes.
- Despite finishing negative for the first time since 2008, the S&P 500 outperformed Novel’s Asset Allocation strategy for the tenth consecutive year. Novel Investor outlines a basic asset allocation portfolio, which they include in the above table under AA. We first highlighted the recent weakness of the Asset Allocation portfolio in 2015. In 2018, despite finishing with a -4.4% return, the S&P once again outperformed the AA portfolio. Despite having a 40% allocation to bonds, it still struggled due to poor small cap and international stock performance. Even with a large bond allocation, the AA model often outperformed the S&P 500 from 2000-2008.
What the Lousy Q4 2018 might mean for this coming year
The fourth quarter of 2018 was the twentieth time the market was fallen 10% or more in a single quarter since 1945. Bespoke Investment Group looked at all the times this occurred historically and the subsequent performance going forward:
At the very least, these numbers suggest that poor performance in one quarter was not a harbinger of doom. A year later, the market was higher 15 out of 19 times with a median gain of 23%.
2019 is off to a good start, with a rally of 6% in the market. Still, we advise caution, as last year had a similarly strong start before a sharp 10% decline at the end of the month, leading into February, and a negative finish to the year.
We will continue to look toward MACROCASTTM to determine if any further volatility is the start of a potentially deeper and longer downturn.
The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as a suggestion of any investment recommendation, investment strategy, or as an offer of advice to buy, sell, or exchange any investment product or investment vehicle. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management, Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC, a Registered Broker/Dealer and member FINRA/SIPC