December 31, 2018

Stocks opened higher this morning but quickly lost steam. The Dow is currently up 150 pts and the SPX is up .33%. Healthcare is the best performing group in early trading, up about 1%. Retailers and tech stocks are also in the green. On the other hand, utilities & real estate sectors are in the red. The VIX Index fell to 27 this morning; the fear index spiked to 36 on Christmas Eve. Foreign markets were mostly higher in today’s session. Even China’s Shanghai Composite Index picked itself up off the floor. It climbed .4% overnight but is still down something like 28% for the year. It’s no secret that the emerging trade war has dented China’s economic momentum. Commodities are mixed today: copper -1.8%; oil flat; gold flat; iron ore +.2%. But the overall trend has been lower; during 2018 the Bloomberg Commodity Index fell nearly 13%. Bonds are mostly unchanged today. The 5-year and 10-year Treasury yields are hovering around 2.54% and 2.70%, respectively. Bond traders are saying the 2.70% mark is a key psychological support level and if the 10-year falls below that it will likely continue falling toward 2.6%. By the way, for all the massive volatility in the bond market this year, the 10-year yield will have gained a mere 27 basis points (.27%) during 2018.

Another day, another trade-related Tweet from President Trump. The president had a “very good call” with the Chinese president, with “big progress being made.” The Wall Street Journal immediately cautioned that the president may be overstating that progress. The story illustrates how disillusioned investors are with the Trump Administration. In 2016-2017 he was considered a friend of investors by virtue of corporate deregulation and tax reform, but those days are gone. Both investors and business leaders are for the most part not happy with the trade war, government shutdown, insistence on the border wall, etc.

It’s time to review 2018 performance for the major market sectors. The ONLY sector with a positive return for the year is healthcare, +4%. Next up, the usually defensive utilities sector fell less than 1%. Next in line, the typically uber-growthy technology & consumer discretionary sectors fell just 1-2%. Real estate fell over 6% and the consumer staples sector fell almost 12%. All other sectors were down between 15% and 20%. So 2018 was not a story of growth vs. value. It was a story of interest rates, the yield curve, the Fed, and the trade war. Lots of crosscurrents. Nothing about the stock market has been simple of straightforward.

Vanguard CEO Jack Bogle was interviewed by Barron’s last week. Here are just a couple of excerpts. “Trees don’t grow to the sky, and I see clouds on the horizon. I don’t know if and when they’ll arrive.” He urged caution for investors in 2019. “If you were comfortable at a 70% [equity] to 30% [fixed income], under these circumstances you’d like to go back to 60% to 40%, or something like that.” Wow, coming from such a well-respected long-time investor, these comments seem like garbage—non-committal, unhelpful, and certainly much too late. One wonders how Warren Buffett would respond to that.


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