CMW MONTHLY MONEY PULSE™

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February 22, 2019
CMW MONTHLY MONEY PULSE™

We’d like to open today’s money pulse with a recent quote by Argus Research Co. Market Digest, 2/22/2019:

“Back on December 24, the Dow Jones Industrial Average closed at 21,792.20 and things were looking dour indeed. For their part, corporate executives, directors and beneficial owners were snapping up shares as if a holiday sale was in full swing. On February 15, the DJIA closed at 25,883.25, marking a recovery of 4091.05 points, or almost 19%.”

It would appear a dreaded bear market is not in the works just yet.

Today’s Money pulse will be a follow up to last month’s as we talk more about our Bear Market Drills.

Let’s say it again, Bulls don’t just fall over and die. In fact, 2/3 of the losses in a downturn frequently take place during the last 1/3 of a bear market.  What exactly does that mean? Well the bull starts losing steam and the market goes down, and eventually that same frenzy to get into the market while it’s going up turns into frenzy to get OUT of the market until the market bottoms out.   So what does that look like in a globally diversified portfolio and how does one survive a bear market. Take a look at the chart showing Asset Class returns for 2000, 2001 and 2002:

With hindsight, we all understand now that this Bear Market was caused by the Technology Bubble.  Look at what Tech’s return was in 1999: 85.59%. Wow. And because the Large Growth asset class overlaps with Technology, look at its return – 34.73%.

When the bubble burst in 2000, notice what went down the most – Tech and Large Growth.  But also notice everything in blue, particularly mid value and small value.  In 2000, they returned over 20%.  In 2001, you will notice Mid Value slipped into negative territory, but Small Value held in the positive. Then in 2002 (the last 1/3 of the downturn) All U.S. Equities dropped negative.

Continue down the chart and check out Bonds.  The flight to safety pushed bond returns up significantly.

So how do you survive a bear market?  By owning ALL asset classes ALL the time and staying true to your investment strategy because if you had jumped out of the market in 2002, look what you would have missed in 2003!

Just take a moment to look at what experienced the biggest loss and then what that same asset class did in 2003.  Like a ball being bounced off the floor – those that were thrown down the hardest bounced back the highest.

Next we take a look at the 2008 bear market, which was a completely different bear than 2000-2002:

The 2008 bear was caused by a global financial crisis.  Imagine for a moment going through a Fast Food Drive thru.  You place your order, you pull to the first window and you pay for your food.  Do you get your food? No, you have to pull up to the next window.  But you wouldn’t have paid if you thought you wouldn’t get your food at the next window right? Banks loan money overnight to each other with a promise to pay in the near future. During the crisis, banks didn’t know who was going to be open the next day, so the pipes froze on interbank lending, leading to a money supply issue which extended far beyond just the United States.

A few characteristics to note leading up to this bear market is the shift in 2006 and 2007 from Large Value to Large Growth and the same in Mid-size companies.  This could be an indication of market sentiment and that optimism is turning to greed.

Value companies are typically viewed as a less risky investment than growth companies.  Also notice that in 2008, as opposed to the 2000-2002 crisis, US and Foreign Equities went down. What held up your portfolio then?  Bonds,  yet again, a flight to safety. Note again the fierceness of the bounce back in 2009.

Did you know that in 2018, all asset classes ended negative EXCEPT: Health Care, Short-term Treasuries, Short-term Corporates and Intermediate-term Treasuries? Or,  that in 2017 ALL asset classes were up? Aren’t you glad you owned them all? The point is, what goes up must come down, and the market yields on average an 8-10% return for a 10-year period. What we don’t know is what is going to move up or down, when it will and how long it will stay that way.  So, that’s why it is critical to own all 24 asset classes ALL the time.

Just remember, while some patterns can be seen from past experience, there’s no telling how the next bear market will form or work its way through to the next bull. As always, past performance is not an assurance of future results.

Have a great weekend!

Indexes are listed in respective order to their reference above: DJ Industrial Average TR USD, S&P 500 TR, DJ US TSM Large Cap Growth TR USD, NASDAQ 100, Technology NTTR TR USD, DJ US Health Care TR USD, DJ US TSM Large Cap Value TR USD, DJ US TSM Mid Cap Growth TR USD, DJ US TSM Mid Cap Value TR USD, DJ US TSM Small Cap Growth TR USD, DJ US TSM Small Cap Value TR USD, FTSE NAREIT All Equity REITs TR, DJ Gbl Ex US Select REIT TR USD, Bloomberg Commodity TR USD, MSCI EAFE NR USD, MSCI EAFE Growth NR USD, MSCI EAFE Value NR USD, MSCI EAFE Small Cap NR USD, MSCI EM NR USD, BBgBarc US Corporate High Yield TR USD, FTSE WGBI NonUSD USD, JPM EMBI Plus TR USD, BBgBarc US Govt 1-3 Yr TR USD, ICE BoafAML 1-3Y US Corp TR USD, BBgBarc Intermediate Treasury TR USD, BBgBarc Interm Corp TR, BBgBarc US Treasury US TIPS TR USD. These materials have been prepared solely for informational purposes based upon data generally available to the public from sources believed to be reliable. All performance references are to benchmark indexes. Performance of specific funds will vary from respective benchmarks. Past performance is not an assurance of future results. Each index cited is provided to illustrate market trends for various asset classes. It is not possible to invest directly in an index.