Looking back, looking ahead

Life can only be understood backwards; but it must be lived forwards, observed Soren Kirkegaard, 19th Century Danish philosopher. Therefore, we must examine at least briefly what occurred during 2018 in the worldwide financial markets.

As noted in prior columns, probabilities were high that it would produce a stock market slump in the second half of the year if only because it was the second full year of the Presidential cycle. Nothing in life is certain but we continue to have confirmation of this from the terms of Presidents Trump back through Reagan. The exact reasons for this phenomenon are unknown, but it is more profitable to know the fact than the reasons behind it.

I know of only one friend who may own only the S&P 500, but almost all pay attention to it so we will begin with it. Total return including dividends was minus 4.39 percent. The Dow 30 Average lost 3.48 and the Nasdaq 100 eked out a .04 percent gain from its dividends.

The reason you may have dropped more in value than those lies in diversification. The MidCap index shed about 11 percent. The SmallCap Growth index fell by 4.09 percent without dividends, but those stocks rarely pay them. The Value SmallCaps lost 12.68 percent. The worst of all results came from international markets with the MSCI* World (ex US) index dropping 14.2 percent in price. This year, diversification actually cost money.

Almost all indexes are weighted by the worth of the company values (market capitalization weighting) and so, results varied greatly from one stock to another. In the S&P 500, Advanced Micro Devices rose by 79 percent while formerly blue chip General Electric plummeted another 56 percent. Only 174 of the index gained any price increase.

Even the so-called FAANG stocks divided this year. While Netflix and Amazon gained quite a bit, Google lost a little bit, Apple dropped over 6 percent and Facebook dived by 25 percent. Mark Zuckerberg is feeling a little bit poorer these days, but I doubt if you feel too badly for him.

The other side of the table, fixed income, fared a little better by year end since the proceeds from stock sales moved to the supposed safety of bonds and cash. On the last business day of 2018, Bloomberg Barclays US Aggregate Bond Index finally went positive and gained .01 percent! If not for that, it would have been the first year in history that both the S&P 500 and the Aggregate Bond Index had lost money in total returns.

Intermediate US Treasuries gained 1.4 percent because dividends received were a little higher than the value lost. Same with Ginnie Mae’s at 1.03 percent and long dated municipals at .34 percent total return. The higher yielding Investment Grade and High Yield US Corporate bond indexes lost value even with dividends paid, each down over 2 percent.

The bottom line is that those of you with bank money in the form of CD’s of a couple years or longer in maturity finally won the annual contest. Don’t gloat because, while this happens once or twice a decade, the third Presidential years are the highest for stocks again. It is a perfect 19 times in a row and 21 of 23 since 1927.

Speaking of 2019, the economy is still doing fine. We have gone from stocks priced for perfection in September to now being priced as though we were already in a recession. The S&P 500 PE ratio is now just over 15. Our friends at First Trust LP expect earnings of the S&P 500 to grow by another 20 percent this year. Interest rates can stand to be higher without choking off US economic growth. The sky will probably not fall even if growth slows.

(Advice is general in nature and not intended for specific situations. Past performance is no guarantee of future results. All statistics from Bloomberg, By the Numbers Research, or Worden Brothers, Inc., TC2000, 2019.)