Our 2018 year-end market commentary spent some time discussing the sharp contrast between 2017 and 2018 as nearly every asset class ended in negative territory for 2018 compared to positive returns across the board in 2017. In a case of history repeating itself, we could have the same discussion today about the first quarter of 2019 compared to the 4th quarter of 2018. The market is off to a phenomenal start to 2019 with strong returns everywhere you look. Just look at these numbers:
2018 Q4 Return
2019 Q1 Return
US Large Cap
US Small Cap
Barclays Aggregate Bond
Talk about a dramatic reversal! Every asset class that had negative returns in the 4th quarter of 2018 finished the 1st quarter of 2019 in positive territory, with most up double digits. So, what should we make of this drastic turnaround?
Try to take yourself back just a couple months and think about how you felt about the state of the markets and the performance of your portfolio. Were you convinced the market was heading off a cliff and that made you panic and want to sell all your equity holdings? Or did you take it in stride, knowing this is just a normal part of the market cycle?
If you panicked, perhaps it’s time to revisit your overall asset allocation to make sure it’s aligned with your risk tolerance and return objectives. If you stayed calm, congratulations, but don’t get too confident in yourself, this was just a very short-term market drawdown and at some point, we’ll go through something worse. Make sure you are prepared for that possibility.
If the wild swings in returns the past few months have taught us anything, it’s that we absolutely cannot predict what markets will do next. As always, there are reasons to believe they will continue on this upward swing the rest of the year and there are reasons to fear another downturn like we saw last year. While we can’t predict what the market will do, we do know the economy appears to be healthy and there have been no serious signs of a looming recession.
Josh Brown recently wrote an article where he recounted a great analogy for the relationship between the economy and the stock market from noted fund manager Ralph Wagner:
“There’s an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch.”
“But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the dog watchers, big and small, seem to have their eye on the dog, and not the owner.”
In this analogy of course, the dog walker is the economy and the dog is the stock market. Rather than focus our attention on the stock market, which will dart randomly in every direction like the dog, we should try to focus our attention on the economy, which generally takes a much more direct route to a final destination, just like the dog walker.
This analogy could be similarly applied to our approach to financial planning. We help our clients develop long-term financial goals and then determine what they need to do to reach those goals. The path to reach those goals will inevitably twist and turn along the way, either due to market swings or major life events. Our job is to help you constantly reassess your long-term plans to make sure you stay on the right path. If you feel you need an update to your own plan, or feel you don’t have a good plan in place, please reach out to us to schedule a meeting!
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.