Early January 2019 Newsletter

Early January 2019 Newsletter

by Advisor Websites_2 on Feb 2, 2019


Market Review

The markets fell about 10% in October and November. Them seemed to have found a bottom, and things looked to be stabilizing. Then in late December the markets fell even further. Nearly every asset class was affected. I understand that these declines can be worrisome and painful.

THIS IS NOT 2008. In 2008, the economy was suffering a mortgage crisis, falling home prices, a corporate debt crisis, and losing 800,000 per month. In 2018 the economy was generating 200,000-300,000 jobs per month. That is an over a million job a month difference. The economy is not just sound, it is doing very, very well. Corporate earnings are still growing and expected to grow in 2019. The Christmas Shopping season was record setting. Wages are up. Inflation, gasoline, and taxes are low. The economy is fundamentally VERY strong and set to continue to do well.

Why is the market falling? And why so fast?

The market falls faster than perhaps is did in the past due to two reasons:

  1. Technology. It is easier to place transactions than in the past, and more institutions use computer generated trading models that have a more short-term orientation.
  2. Index funds. In the past, if investors put in sale orders for a mutual fund, the mutual fund manager would decide what stocks to sell, and what to keep. This kept many market declines a little more manageable, with stronger companies holding up better. With index funds, an investor sells the fund and the fund sells every stock in the index to raise the cash to pay out the investor. This results in wide spread and indiscriminate selling. Excellent companies get sold with the weaker ones…this creates more pain more quickly.

The ‘worries’ affecting the market related mostly to the Federal Reserve raising rates too far too fast, and the China trade issue. The Fed chief gave a speech Friday and said the right thing; that they will be monitoring conditions and make needed adjustments based on the facts on the ground, not a ‘pre-determined’ course of action. The Markets rose 3-4% Friday and I believe this worry is now largely over, and we can expect prices to recover further with this concern addressed.

Concerning China, this too is way overblown. While I do believe that we do indeed need to address a variety of trade concerns with China, the markets have overreacted. Our exports to China are about ½ of 1% of our GDP (total national economic output). If we experience a 20% in slow down (due to failure to avoid tariffs and reach an agreement with China) in an area that is only .5% of the economy, then our economic growth slows .1%. Yep, .1%. Growth falling from 2.9% to 2.8% should not create this kind reaction. This too is overblown. We will arrive at some sort of agreement with China that Trump can call a victory, China will behave nicer for a while and this worry, economically, will shrink.

What about the entire economy slowing? We have record employment, record job growth, rising wages and more job openings that than job seekers. Our economy is 70% based on consumer spending. Consumer spending will remain strong because the labor market is strong. European or Asian growth slowing will not derail our economy, and 99% of the time we have better economic growth than Europe anyway. Slowing Asian growth also has little impact because we export very little to Asia.

What I am doing?

I am not selling our excellent investments at these low (I believe temporarily low) prices, when the market reaction here is so clearly overblown. Missing an upward trend is as expensive, or more so, that selling and missing a some of the decline. My family’s investments are still 95%+ invested in the market. We own the same set of holdings that most clients own.

I have re-allocated many accounts to increase portfolio income, so we earn more dividends while we wait for the market to recover. Additionally, I have reduced exposure to computer hardware sellers focusing our tech holdings on software companies that are almost entirely domestic and have fewer risks then hardware manufacturing firms. I have not reduced our investments in medical technology and continue to see this a great long-term allocation.

What should you do?

Fund your Roth IRA or Traditional IRA and add to your taxable accounts as well.

Fund your Roth IRA or Traditional IRA and add to your taxable accounts as well.

Fund your Roth IRA or Traditional IRA and add to your taxable accounts as well.

Stocks will not be this cheap in the future. Contact me to work out the logistics of adding to your account.

What Should you NOT do?

Sell now, throw in the towel, get super conservative, or buy an annuity. All of these moves cement your lower account value at the lows, and you will MISS the recovery. The bottom of the market is usually when a few clients start throwing in the towel.

Annuities are particularly bad. They sell you the annuity by telling you that the stock market is too risky, and you need to avoid it, and buy this ‘safe’ alternative. The CON is this: The annuity company puts your money in the stock market, makes stock market returns long term and pays annuity investors about 1/4th to 1/3rd what they earn. You get an annual statement that does not show if the market is up or down, and that does not detail the insurance companies’ investments. The insurance company will have losses when the markets have decline, they just don’t show you. The insurance company will have gains when the market goes up, they just don’t tell you and keep most of the profit.

I have seen prominent Cincinnati ‘investment advisors’ selling annuities that pay them a 15-20% commission and pay the client 2% when the market went up 18% (this is a real example). My average client pays about a 1% a year management fee, so they (the annuity sellers) get 15 or more years’ worth of fees the week they sell you the annuity. These are a VERY bad idea for clients.

Contact me to review your account and investment plans.


Other News

I am still evaluating custodians (competitors to TD Ameritrade). I have decided against moving to Interactive Brokers but continue to review options with E-Trade and Cambridge Investment Research. My goal is lower trading costs and better service.

I am also hiring an assistant. The goal is maintaining a high level of customer support as Bullseye Grows. I will have a more detailed announcement about this very soon. The assistant will work out of my Cincinnati office, where I have the available office space.