Winter Update 2019
As we get ready to move the calendar forward to 2019, let's say goodbye to 2018.
2018 was not a kind year for investments. It was also a frustrating year as nothing worked. Stocks declined globally especially during the end of the year as investors worried about the prospects for slowing growth. Bonds declined as central banks continued on their path toward higher interest rates. Oil and other commodities were down as well. Business headlines moved from worries about economies growing too quickly stocking inflation to slowing growth and recession talk all in a matter of a few weeks. Not that I am an economist, but I am not sure that a recession is probable with unemployment rates at fifty year lows. Yes higher interest rates are sure to cause a slowing economy. In fact, it already has, North American auto sales are down and the housing market has slowed. A recession? Odds still seem pretty low at this point. Maybe the silver lining in all of this is that the central banks will now stop raising interest rates.
Throughout the last few weeks in December, market conditions globally have notably worsened. Up until recently, 2018 was just a bad year, not an awful year. As of Christmas, it has now turned into an awful year. You are probably seeing news headlines of a 'bear' market and new doomsday forecasts. A 'bear' market is generally defined as market declines of more than 20%. As of Christmas, the US market S&P500, the Nasdaq market, the oil market, The Japanese NIKKEI market and the German DAX market were all in 'bear' market territory.
Who's afraid of the big bad Bear:
Bear markets, corrections, downturns, volatility or whatever they are called are all pretty much the same. These are periods where investments are declining and people are afraid. Fear tends to bring the worst thoughts, not the best. Fear tends to result in emotional overreactions. Emotional overreactions are almost always mistakes. These 'bear' markets are a fact of investing, they happen with regularity. In my thirty year career, I can fondly recall them all. The years 1994, 1998, 2001, 2008 and now 2018. When we create plans for our clients, our plans take bad markets into consideration. We don't know when they will happen, we don't know how long they will last, but we do know they will happen. Our return expectations for your investments take such markets into account. We plan for downturns, as we create plans for our clients that have a strong likelihood of success. When considering this particular downturn, our expectations have not changed.
What to do next:
In the past several weeks my mind has wandered back to 2008. Our longer term clients will remember 2008. The once in a 75 year event in which stocks declined by 40% in three months. I have thought about the events during 2008 that triggered such terrible markets. The implosion of the US housing market, the risk of failure of the US financial system. I think about today, unemployment at a near 50 year low, interest rates still historically very low, corporate profits at or near records, a strong period of economic growth. What is causing such volatile markets today? Is it politics, is it rising interest rates, or is it something else?
The biggest mistake that I made during 2008 was not being aggressive enough in recognizing the once in a generation opportunities to buy high quality stocks at ridiculously low prices. The biggest success that we had was working hard with every client to convince them to hang on and stick to the plan, NOT to give in to their emotions. In 2008, the US S&P500 market was down 37% for the year. In the next five years, during 2009-2013 the market went up 90%. Guiding our clients to stick to their plan was again the correct path.
Today, we are faced with the same challenges, the same risks, the same emotions of having to deal with falling investments. If your goal is wealth creation, this is the time to do it. High quality stocks are on sale. Let's get together and buy high quality stocks that are temporarily down in value creating opportunities. If your goal is retirement income and capital preservation, we will conquer this period as we have in the past and look toward better market conditions and better results ahead. We have been here before and we know what to do through experience and our unwavering dedication to helping you succeed.
Here are my own thoughts:
Markets have been in the process of discounting slowing economic growth globally, a possible recession, and the possibilities of higher interest rates. Simply, it is a period of uncertainty and markets hate uncertainty. Markets also seem to be discounting high levels of political uncertainty such as Brexit, trade wars and interest rate policy. I firmly believe that all of this discounting is overdone, that 2019 looks good and that there is not a recession that is imminent. In the past 10 years, our Canadian stock market, TSX300 has been one of the worst performing markets in the world. Reversion to the mean would suggest Canada's market may well be one of the best in the world during the next 10 years.
With many global markets down 20% or more from the highs, there are now many high quality stocks that are trading at reasonably good valuations. Interest rates may well have peaked for the time being and there are investment returns ahead.
We will continue working with each client to optimize investment portfolios and continue to achieve investment success.
Happy New Year!
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