April was a “backing and filling” month for investors. This is a stock market term that applies to prices as they attempt to digest a large run up. After a monstrous 5.6% jump in prices in January, the return to stocks in April, measured by the S&P 500, was a mere 0.27%. Year to date, returns have fizzled and are now down 0.38%. These results mask some eye catching day to day price moves. For example, out of the 21 trading days in the month, 9 involved an up or down move in prices of greater than 1%.
This volatile yet sideways pattern is likely a byproduct of last years extended rally in stock prices that led so many investors to the trough of complacency. Fifteen months of positive returns will attract a lot of attention – suddenly investors began chasing returns, and taking on more risk. It had become too easy. A reflection of this mindset was the craze over bitcoin. That was an extension of the high risk-taking mentality that consumed investors worldwide.
On January 26th, stock prices hit their 14th record high of the year. Over the next couple of weeks we experienced a full on reversal of the prior year’s blind optimism and things turned ugly. By February 9th, stock prices had fallen over 10% on an intra-day basis. The dust settled, and things seemed ok, until April 2nd when prices went right back down to those uncomfortable levels. The origins of this sudden shift in market direction initiated a raft of media speculation as to what might have gone wrong. Was it the US 10-year Treasury nearing 3%, the looming Federal Reserve interest rate hikes or possibly saber-rattling talk from Washington about trade wars? When market trends change, it is often unclear what precipitated the change. For us, the more important question is the emerging trend – what does the slope of the developing trend in prices look like?
As an investor, it’s important to focus on and identify investment goals, particularly long term. The big considerations are, what are we working toward and what is the best path to get there? Trouble often shows itself in the short term. While things that come up admittedly do not normally have any bearing on long term goals, or the agreed upon path, they can be un-nerving to the point investors retreat. There are times when owning stocks is flat out uncomfortable.
After years advising people how best to position their financial assets, one thing clear to me is how easy it is for investors to become disillusioned. Admittedly, there is some concern the world at large is sliding down a slippery slope. This may be true, or it may not. In my opinion, though we perceive a tenuous backdrop today, there has always been a long list of things that could go wrong. Often, we did not know there was a monster under the bed. I suspect our current cautious awareness puts us in a better position to look ahead and acknowledge risk. Stocks are inherently high risk, high return, and when investors dismiss this we are collectively on thin ice.
Our goal is to guide our investors in a way that allows them to hold quality investments during challenging times. As active investment managers, this requires our constant attention and a balance of art and science. We use analytical tools and fundamental analysis, along with a considerable dose of experience. We also use a risk-on, risk-off approach to profit during the good times and temper the effect of the difficult periods. This is in stark contrast to passive index strategies or a blind reliance on asset allocation models.
My expectations are for the recent surge in volatility to continue, though tempered somewhat. I also expect stock prices to move higher by the end of the year. Earnings have been strong through the first quarter and analysts’ forecasts through the year-end are high. I do not expect stocks to deliver anything close to the 20%+ returns we saw in 2017. Considering the backdrop, we ought to expect it to remain challenging. We are constantly asking whether the choices we are making today are additive to your long term goals. At the moment, I am optimistic we are well positioned for the year ahead, but I am also prepared to change course if need be. I invite you to call if you have concerns.
Bruce Hotaling, CFA