What a Difference a Year Makes
Our 2017 year-end review was highlighted by low volatility and above-average returns for most all asset classes. In sharp contrast, 2018 was a year in which essentially zero asset classes advanced. No major asset class gained more than 5 percent for the first time since at least 1972. Stocks posted their biggest loss since 2008 amid rising volatility. In Jeff Gundlach’s “Just Markets” call, DoubleLine Capital shared that in 2018 – a universe comprised of 30 equity indices, 34 bond indices, 5 commodities, and a home price index – it was the first year since 1900 that not one of the 70 asset classes posted a positive return.
The backdrop of rising interest rates and global quantitative tightening appeared to lack the liquidity necessary to drive asset prices higher. While there was essentially no major asset class that generated positive returns, there were better places to hide.
In the third quarter, our Investment Committee reduced targeted exposure to equities seeking higher levels of cash and short-term bonds. In the fourth quarter, all major equity indices posted double-digit losses. While there has been a welcome relief rally to begin 2019, we believe that for the time being bear market rules of selling rallies versus buying pullbacks will likely be rewarded.
While it does not appear that a long drawn-out bear market like 2000 or 2008 is in store, whereby equities lost over half their value, it does appear that volatility and a downside bias could persist into the second quarter. Essentially, all global stock indices have been declining on average over the past 200 days, and the probability of a global recession that likely will not include the U.S. is high. Under these conditions it is typical for a bear market to last about three quarters of which we would be just over a quarter of the way through it. For that reason we continue to be defensively positioned until perhaps the second or third quarter while monitoring asset allocation models and economic information daily to see if changes to a more defensive posture are warranted.
Above is an update with year-end values for a chart we shared in December. Essentially, it shows the range of major asset class returns from 0 percent to -14 percent while the median asset class returned -7 percent on the year. The past year was a reminder that market and economic conditions are constantly changing. Our Investment Committee reviews economic and allocation information daily and each client portfolio every ten business days in an effort to have investment strategy adapt to the current investment climate.
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Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.