Here’s What Happened in The Stock Market for 2018

2018 turned out to be a year where what should have worked, in the end, did not.

The first few months of the year were wild and crazy with swings up and down.

Then we had a reasonable upward move over the next 4-5 months where the Russell 2000 and Nasdaq lead the way higher. In other words, we had a good market rally led by smaller US-centric companies. With questions around international trade (trade wars) and overseas politics (Brexit), investors looked to USfocused small caps as the go-to investment and it was working.

All of this ended in October with all major US indexes taking a meaningful hit. The largest of which was the small-cap Russell 2000 down over 12% for the year.

It truly turned out to be a year where what should have worked, in the end, did not.

 

Here’s What We Have Done To Adjust To Current Market Conditions

You often see me write, “when the facts of the market change, so shall we.”

The facts of the stock market have changed. We are now trading under bear market rules until the facts of the market prove different.

In the second half of December, 3 out of 4 of our Bull vs Bear Market Indicators switched from Bullish to Bearish.

As a result of the recent market behavior and confirmation from our indicators, we began implementing our bear market action plan during the 4th quarter of 2018.

This process includes tax loss harvesting, a full review of all positions, analyzing investments against their peers, and adjusting asset allocation to account for increased risk and volatility.

As more indicators started to show bear market tendencies, our steps included a further reduction in portfolio risk.

I think the most fitting analogy to this situation is operating a boat at the coast. When it is high tide, you can run a boat just about anywhere you want and not run aground. However, when the tide is going out, you better get your boat between the channel markers or you are almost certain to get in trouble.

This summarizes the actions we have been taking in recent weeks to adjust investments to accommodate recent market actions.

To wrap up a summary of our action plan, I feel fortunate that even with the losses sustained in the stock market recently, we have a clear investment plan that was developed for these types of market environments. We are following our plan, monitoring our indicators and have been making changes to portfolios as conditions warrant.

What To Expect Going Forward

My comments above about investing under bear market rules are not meant to cause worry. They are intended to provide factual clarity and to better inform you about what could be ahead for us as investors.

In addition, even though I believe we have entered a bear market, our research does not point to a recession in 2019. From my perspective, this is a good thing.

To conclude, I want to go back to my boating analogy.

We have the family loaded up in the boat, we have our fishing gear ready to go, and we are in the channel heading to our favorite fishing hole. We see some storm clouds on the horizon, but the radar isn’t clear if they will impact our ability to fish or if we will have to turn around and head back to the dock.

I think this analogy paints the best picture of where the stock market and economy are today and the way we need to approach 2019.

We will continue to monitor our indicators and will make portfolio changes as warranted by the market and economic data.

If you would like to discuss how this directly impacts your account or other financial endeavors, please give us a call at 800-722-5862 and we can go into more detail. We appreciate the trust you have placed in us, and we continue to do our best to navigate current market conditions.

Sincerely,
Kern