There are jobs in the world where you are paid the same amount every day you go to work. There are other positions that pay more on what is accomplished on an individual basis. Our profession as asset managers finds the pay the same but the importance or value on any given time period to be volatile. 2018 is so dramatically different – not in a positive fashion – from last year that the value of professional and disciplined money managers is higher today than a short 12 months ago.
This year has ushered in a blood shed market that has just recently been revealed to the retail investors and 401k participants. Currently, 89% of assets have given investors a negative return so far in 2018 and is the highest percentage of negative assets since 1901! This is practically a 180 degree spin from the record low 1% of assets that were negative in 2017, according to data from Deutsche Bank. “This is an excellent example that trends can change quickly and the need for investors to stay nimble, to some degree, when it comes to asset allocations and broad diversification does not always provide the safety net that so many have come to expect within their portfolios,” says Andrew Thrasher, CMT of the Financial Enhancement Group.
From first to worst in 12 months is pretty extreme but we do live in interesting times! The obvious guess is that the number of assets gaining ground will increase and move back toward the middle ground with roughly 35% to 40% of assets showing negative returns. When that occurs is of course not known at this point.
The anxiety of the equity market right now is in the trade conversations with China and what tariffs would really mean to the American economy. Remember that the equity market is a voting machine betting more on the trajectory of the future earnings rather than the present situation. Clarity is perhaps a markets best friend and today few issues are clear.
The second concern is the Federal Reserve and rising interest rates. When the 10 year U.S. Treasury was at 1.5% investors felt obligated to invest in areas that had a chance to outpace inflation. Today the 10 year yield’s just above 3% and makes a more compelling case for investor capital. Furthermore, the strain on the U.S. debt load increases as rates rise.
The bet that the current legislators made a year ago was that tax rates being lowered on corporate earnings would offset the new increased debt load taken on by the American people. As earnings growth slows, as debt payments increase, and the uncertainty of the trade negotiations continues to move toward a January deadline, the question of rising tax revenues based on tax breaks becomes more questionable.
Remember, the market is a betting machine on the future and the wager is based on trajectory of earnings and revenues. A common mistake by investors is to discuss the equity markets and the economy in the same sentence. Both matter but are two different beasts.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.