Market Update
We would like to dedicate this edition of RAA monthly to Sir Isaac Newton. The simple reason for this is because of something so incredibly rudimentary that he said hundreds of years ago that will never be forgotten. It was the cusp of his Law of Universal Gravity..."What Goes Up Must Come Down".
Ain't it the truth?!?
We hope that you all take the time to read these newsletters each month. Jason and I don't claim to be able to predict the market but if you paid attention over the past few months you certainly should have been prepared for some gyrations.
To kick things off, here is a quote from last month's newsletter sent on October 4th...the day the correction began...good timing huh?
"There is no doubt that the Dow Jones Industrial Average and the S&P 500 indices have had a banner year. Up 8.83% and 10.56% respectively as of the end of September."
And here is another from our newsletter on August 4th.
"Please do not chase returns.
Just because FANG sounds cool and has performed very well over the past couple of years, does not mean it's for you or you should have all your money in it."
Now let's see how things look as of Friday. It's quite a different picture. The Dow and S&P are now up 3.5% and 3.45% for the year. Yes, the major stock market indices are still up for 2018. That may seem hard to believe given all the headlines and news stories talking about corrections and bear markets. Remember, however, that the Dow and S&P are only indicators of large US company stocks NOT a diversified portfolio. There are several individual stocks, sectors and countries that slipped into bear market (dropping by 20% or more) territory in this selloff. Unlike the first 9 months of the year, proper risk management strategies have helped to dampen volatility and improve performance. For instance, gold was up 3% in October. Short term high yield bonds and floating rate bonds performed well and proved to be a good place to hide and generate decent income. We exited our energy investments on October 12th when our indicators told us something was not right (we like to say our Spidey senses were tingling). That proved to be a great trade as energy had a really tough couple of weeks. Lastly, international markets continued to falter. However, our favorite fund pick, FMI International Fund (FMIJX) has once again showed us why we continue to own it. It has done a terrific job capturing upside returns while seeing considerably less downside risk. Kudos to FMI !
At the market bottom reached on October 29th, the Dow was actually down 1.43% and the S&P was down 1.83%. That was a drop of 8.76% for the Dow and 9.55% for the S&P.
Guess what...the same stocks that let the market to all-time highs on October 3rd, were at the front of the pack on the way down.
Here is where the most pain was felt. The Russell 2000, a small cap index, was up 12.4% when it peaked on August 31st. At the low on October 29th, it was down 4.7%...ouch! As of Friday, it's still in the red, down 0.92%. This exaggerated volatility is the primary reason that we tend not to own much if any small cap stocks in our client portfolios.
As of October 3rd, the S&P Technology Sector Index was up 17.28%. Three weeks later, after one of the fastest corrections we have ever seen, the index was only up 3.4% for the year. As of Friday, the technology sector has recovered some and is now up 8.96%.
As Sir Isaac Newton said, "What Goes Up Must Come Down".
At the end of the day, if you were able to avoid being sucked into the shock and awe of the newspapers and business channels, stuck with a good mix of investments and understood that corrections are completely normal and necessary (even if they sting a little) occurrences, you wound up OK. Keep in mind that the same corrections and bear markets are where the best opportunities are created, and we are continually on the lookout.
We would like to close out this month by sharing one our favorite investments with you.
USMV; iShares Edge MSCI Minimum Volatility USA ETF is and has been our core holding for exposure to US stocks. The fund measures the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the U.S. that- in the aggregate- have lower volatility relative to the broader U.S. equity market. The strategy has proven itself time and time again. This past month was another successful test. Here are the facts:
As of October 3rd, the market high, USMV was up a respectable 7.73%.
On October 29th, USMV had fallen 5.24%...not nearly to the extent of the overall market (8.76% Dow and 9.55% S&P) and was still up 2.09% for the year.
As of yesterday, USMV is up 5.53% outperforming both the Dow and S&P (3.5% and 3.45%) pretty handily.
The point here is that you don't necessarily need to be aggressive to capture a substantial amount of the returns of the market. Avoiding unnecessary risk and remaining diversified are for more important than beating the market.
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We completely understand the stress and anxiety that comes along with heightened market volatility. We want to thank our family of clients for trusting us with your savings. We work hard to be sure that you are kept informed and remain confident and comfortable regardless of whether the market is up or down.
That being said, we are excited to tell you that we recently purchased brand new state-of-the-art risk analysis software that will allow us to take a deep dive into your portfolios and better position them to meet your goals and objectives.
We look forward to sharing it with you all in our future meetings.
