Q4 2018: PFM Quarterly Commentary
In case you haven’t heard, the global investment markets hit a bit of a snag in the fourth quarter. Understatements aside, December 2018 has joined the dubious and exclusive group of the worst performing months previously experienced only during the Great Financial Crisis and the Great Depression. Worse yet, December’s violent downturn was a continuation of the severe malaise that began in October. During challenging investment times such as these, we always find it beneficial to draw upon broader lessons to help keep longer term trends in perspective.
This time each year, we look to the major Wall Street banks to forecast the S&P 500’s closing price at the end of the year. These prognostications come from some of the world’s most prominent financial institutions that spend considerable time and resources in the effort. Of course, a “forecast” is just industry jargon for an “educated guess”, but they are nonetheless accepted as investment gospel. We review these predictions out of professional interest as they rarely, if ever, inform our investment decisions.
The 2018 year-end predictions we examined at the start of last year came from nineteen institutions whose price targets were neatly clustered together, exhibiting little meaningful deviation. The median forecast for the December 31, 2018 level of the S&P 500 was 3,079. For folks like us who keep score, as we rang in the New Year, the S&P 500 stood at 2,506-an undershoot of nearly 19% from Wall Street’s venerable estimate.
Wall Street denizens are not the only ones steering the investment narrative through their prognostications and observations. Foresights from the often vaunted central bankers of all eras have at times missed the mark. In March 2007, then Fed Chairman Ben Bernanke famously told Congress that “subprime (mortgages) were contained.” Of course they weren’t, and the worst financial meltdown since the Great Depression commenced just months later. Similarly, former Federal Reserve Governor Bill Dudley told the Federal Open Market Committee in August of 2007 that commercial paper from Bear Stearns and Countrywide Financial were under strain, but that “nothing is imminent in those areas.” Bear Stearns, Countrywide Financial, and the commercial paper market collapsed shortly after.
More recently, former Federal Reserve Chair Janet Yellen told a group of economists in July of 2017 that the U.S. wouldn’t experience another financial crisis, “in our lifetimes.” While current Federal Reserve Chairman, Jerome Powell, in responding to a question at the National Association of Business Economics in Boston on October 2, 2018 whether the U.S. economy was “too good to be true” categorized the outlook as “remarkably positive.”
We hope that Yellen’s and Powell’s recent statements prove correct, but even if they are wrong, it wouldn’t change our approach to portfolio construction and management. Rather than calculating the hypothetical level of the stock market in the year 2025 or making sweeping generalizations, we diligently focus on empirical truths to manage portfolios, namely, broadly diversifying investments across different global assets classes using securities which are low cost, liquid, and tax efficient. Portfolios are then rebalanced periodically to take advantage of price movements over time. For Peak, this process is emotionless and steadfast, leaving behind the perpetual fear and greed that causes so many investors to make mistakes.
Unfortunately, for the investment community at large, perceptions are formed and decisions are made predominantly on two emotions: panic and avarice. While there is voluminous data supporting the merits of a disciplined investment approach consistent with the upward persistence of markets, these emotions can too easily become the sole driver of decisions. Given the widespread panic displayed throughout the fourth quarter by the many “professionals” in the financial media, we couldn’t help but be reminded of a quote written by the father of our current economic system, John Maynard Keyes, in his seminal 1936 book, The General Theory of Employment, Interest, and Money. “We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.”
To wit, investors know that markets rise over time because of long term structural expectations, mainly inflation, innovation, productivity, and profit seeking. Yet, despite this knowledge, most investors fall back on emotional decisions because of the powerful urge to do something during stressful times, which are historically infrequent and persist only for short stretches of time. Fortunately, emotional responses to the market’s peaks and valleys were removed from our investment process a long time ago. We prefer to focus our energy on interpreting economic data, market signals, and corporate earnings in an effort to identify sound investment opportunities. We happily leave the prognosticating to those whose job it is to entertain.
While the severity of the market’s decline may be startling, the presence of volatility should not be. 2017 was the most serene year for the market on record and the current expansion is nearing its tenth birthday, which by historical standards is quite long. However, just as the markets can’t go up forever, they won’t go down forever either. In reality, this volatile period will pass just like the scores that have preceded it. We encourage you to shut out the noise and focus on historical precedent; that the financial markets have overcome every obstacle ever encountered. We anticipate this time will be no different.
We sincerely wish you a happy, healthy and prosperous New Year.
Peak Financial Management
Peak has created a monthly “quilt” of returns to track the performance of the major areas of the investment markets over time. We believe that this table best illustrates the fundamental tenets of Peak’s investment philosophy, namely the futility of predicting which investments will outperform over the short term and the unremitting cyclicality of markets. These truths support our firm belief that broad based diversification over many areas of the world economy is the best path to investment success over the long term. Asset Class Quilt of Total Returns- December
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes the judgment of Peak Financial Management, Inc. (Peak) as of the date of this report, and are subject to change without notice.
Additional information, including management fees and expenses, is provided on Peak’s Form ADV Part 2. As with any investment strategy, there is potential for profit as well as the possibility of loss. Peak does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. The underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations of, or guaranteed by, any financial institution. Past performance is not a guarantee of future results.