Comments Off by in CMW News
April 26, 2019

So, whatever happened to the dreaded US economic slowdown we’ve been warned about for this year?

The GDP report for 1st quarter just came in at 3.2%! Less than a month ago we were cautioned that 2% would be a stretch. We suppose now it’s time to sweat that the Fed will not only fail to put in a rate cut, but might even tap the brakes again! Just kidding. We don’t really think that’s likely. But we won’t be surprised to see that kind of hand ringing speculation from talking head analysts.

Enough on the good news! We had no plans to mention 1st quarter GDP until it came in surprising so abundantly on high side, but there it is.

What we do want to focus on is the stark pattern of last year’s correction and recovery going on in the markets so far this year. For that we offer the following graph to deconstruct the anatomy of the correction in your portfolios. Some of you may recall the “Bear Market Drills” we offered in mid-January. For those that couldn’t attend we shared some of that material with you online in other places. This graph traces some of that information.

Click to Enlarge

It shows the total return for several benchmarks CMW uses to target asset classes to gain exposure in client portfolios. We’ve chosen 7 of the more visually interesting asset classes from our 24 pack and the S&P 500 for reference. On the left, eight benchmarks are plotted for the year end of 2017 total returns. These were very strong performances and we note that of all of these benchmarks, plus the rest of 24 pack were all positive for 2017. Of these, only US Equity REITS were less than 10%.

Technology on the other hand soared to 37%. The correction in 2018, measured by the S&P 500 fell from September’s high to a December 26th low just shy of -20%. Technology, while falling dramatically, ended 2018 barely under water and ahead of the S&P by more than 3.5%.

Moving to the right on the graph we see last Friday’s year to date total returns for 2019. Keep in mind that the clock is reset arbitrarily by calendar year, so it isn’t until you move to the far right (the fourth point) where the 12 month trailing return is plotted, that you get an accurate picture of the cliff and the current state of recovery.  Notice that for the full 12 month period going back to early 2018, only one of these benchmarks remains negative – and that was the second top performer in 2017, small foreign companies at 33%.

If we step back further to include the 3 year trailing period (not pictured)for these benchmarks, all show significantly higher performance over the 12 months except US Equity REITS. For example the least recovered benchmark for the 12 month trailing period (small foreign companies at -9.5%) in the three year trailing period remains amazingly buoyant at 7.8%.

Finally, notice the least similar benchmark of the entire group – HealthCare. While it only posted 5th place for 2017, we wouldn’t want to have missed the 22% growth that contributed to the bunch. More importantly, it’s the only one of the eight that held a positive return in 2018 – and decent at 6.25%. Yet since then HealthCare has sort of sputtered out thus far in 2019 resulting in a mere 5% return for the 12 month trailing period.

Ok, we know this pretty boring stuff for many if not most of you. But it’s not for us! And now we want you to know why you’re so glad it’s not.

Pretend this is a third of your portfolio and that each of these components is a plant in your organic garden. We planted each of these and we pluck your income from them and the rest of your portfolio month in and month out. Not only that, but even if you’re not taking income, we go in and prune a bit from the ones that have outgrown their allotted space in your garden and added a little to those that have thrived a bit less. After each time we tend your garden, it’s perfectly back to its proper proportions.

Now, if you did need income which ones do you suppose we plucked from to get it during this period? Of course, seeing this the way we do, you’d likely take the same action as we do by shear common sense. And that’s exactly what it is.

The only difference between your good sense and ours is what we call useful information. There is a very sophisticated strategy in the design of your garden and very sophisticated tools to tend to it but the beauty of the whole thing is the simplicity of the concept. Each plant has a known difference in pattern of growth from the others and while we don’t know exactly how that plays out from one time to the next, we do know that each plant is different and will behave more or less differently that the others and that is how we know what to do after the fact.

What does this all mean in the moment for your money in the market? Where is the market headed and how is that likely to affect your funds?

First, we expect the market to continue to perform well for the remainder of this year. Of course, the better it does, the more likely we are to see further volatility. But that should not dampen our spirits. The US economy, as witnessed by 1st quarter’s numbers, is doing much better than expected after last year’s already strong showing. The global economy continues to expand.  China, the world’s second largest economy, is doing better than many have expected and while there remain many bricks in the ‘wall of worry’ to feed negative headlines, we believe conditions are good for both the near and intermediate term on the economy and the markets. As always, a significant unforeseen event could change all this. But for now, we’re about as bullish as we’ve been during this very enduring bull market.

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.