2018 Year-End Investment Bulletin

After years of consistent returns, volatility has returned to the market in 2018.  The U.S. stocks hit new records in late September, and then began a decline that measured approximately -14.3% when the market opened on December 20th .  At the time of this writing the stock market is down an additional -1.44%.  

While the decline in stock markets inevitably stirs up emotions of fear and concern, it is important to pull the lens out a little and remember the significant gains that have been achieved during the last few years. 

 Prior to the decline this quarter, the S&P 500 had risen 192% cumulatively since 2009, and 105% since 2013! Those numbers equate to average annual returns of 19% and 17%, respectively.  The chart below shows the incredible gains that have been achieved during the last decade.

During the next few days and weeks we will be bombarded with pundits explaining the reasoning for the current market swoon.  Some will say that the Federal Reserve is at fault for raising interest rates, and others will pin the blame on the looming fears surrounding trade wars, or maybe it was the government shutdown.  While each of those items may have played some role in the decline in the stock market, we believe that more fundamentally the decline took place because the market had gone too far too fast during the last several years.  Historically, the stock market has averaged 10% on a yearly basis.  As we alluded to previously, the average gains during the last number of years have been materially higher.  When stocks grow at a greater rate than average for a prolonged period, they tend to reverse course to fall in line with the historical average, and vice-versa. 

We believe this process is always at work in markets, even if it stretches in one direction as it has recently.  You will hear us refer to this as "reversion to the mean."  We target a specific asset allocation in your portfolio, and re-balance back to those targets because reversion to the mean is always at work in markets.

What's next?  Where does the stock market go from here? 

Obviously, the answer to those questions is unknowable, but despite that, some of the big Wall Street banks recently felt compelled to play Nostradamus. 

In a recent article, twelve top firms made their end of year 2019 S&P 500 price target predictions.  As you can see from the table below, the forecasted gains from the current level are quite ambitious.  Clearly, the Wall Street crowd is expecting the bull market to resume.

As we close out 2018 and move in to 2019, we will begin re-balancing your portfolio to make sure that your allocation is in line with your long-term objectives.  If the stock market were to rise to produce the type of returns predicted by Wall Street, we are skeptical that they will be able to be maintained.  Therefore, should the stock market embark on a meaningful relief rally in early 2019, we will consider slightly decreasing target stock allocations.  However, should the stock market continue to decline, we need to be prepared to incrementally increase stock allocations to take advantage of market opportunities that present themselves.