January 2019 Market Update
Written by Brian Johnson, Chief Investment Officer
Summary: The fourth quarter of 2018 was a nasty one for stocks. Through it, we have maintained our defensive positioning. We expect U.S. stock returns over the next 10-15 years to be substantially worse than the last 10 years. However, bond, cash, and international stock returns are projected to improve.
The fourth quarter of 2018 experienced the worst quarterly returns on Wall Street since 2007. Investors saw the Dow Jones Industrial Average move lower by 11.83%, the technology heavy NASDAQ move lower by 17.54% and the S&P 500 Index move lower by 13.97%. Though your statements won’t reflect it, we’ve seen a meaningful bounce through the first few weeks of the year.
The question at this point is where we head from here. Evidence is mixed. A recent breadth thrust, most simply explained as a surge in buying across the totality of the market, offers compelling odds that we may have seen the lows of the decline. However, continued political uncertainty stemming from Brexit, a government shutdown, and the tariff dispute with China, coupled with the potential for bearish earnings disappointments, particularly in the U.S., offers evidence to suggest that this market has further to fall before putting in a sustainable low.
As for the Viridian models, we have continued to position ourselves defensively. In July, the Viridian Balanced and Viridian Conservative models moved from overweight to neutral on stocks, and then from neutral to underweight stocks in mid-November. The Viridian Growth model saw its sector allocations get more defensive throughout the summer and fall, in conjunction with the moves made in Conservative and Balanced. Our Viridian Aggressive model continues to hold a large cash allocation as we wait for market conditions to offer acceptable entries into leading growth stocks (growth stocks are particularly vulnerable during market declines). The Viridian Preservation model has to no equity allocation and remains relatively unaffected by large equity declines.
Long-Term Capital Market Assumptions
Returns over the last ten years (1/1/2009 – 12/31/2018) have been nothing short of incredible in stocks. U.S. stocks have seen tremendous performance with large-caps up 13.03% annually (SPY), mid-caps up 13.4% annually (MDY), and small-caps up 12.1% (IWM) annually. International stocks, though they’ve lagged the U.S. considerably, have seen returns of 5.8% annually for developed economies (EFA), and 6.6% for emerging markets (EEM). Returns in bonds, cash, and commodities have relatively struggled. Over the prior ten years we saw bonds return 3.1% annually (AGG), cash equivalents return 0.24% per year (BIL), and commodities actually have a negative annualized return of -3.49% (DBC).
Our return expectations for the next ten years vary drastically from the returns we experienced over the last ten. J.P. Morgan recently published their 2019 Long-term Capital Market Assumptions and projects the following annualized returns over the next 10-15 years: U.S. large-caps 5.25%, U.S. mid-caps 5.75%, U.S. small-caps 6%, international developed 6.75%, emerging markets 8.5%, intermediate term bonds 4%, cash equivalents 2%, and commodities 2.25%.
So, what does this mean to you? It simply means that we can’t continue to count on extraordinary market returns to make up for a lack of a proper financial plan and / or savings strategy. Lower expected returns require a higher savings rate in order to accomplish goals. Our updated financial plans factor these return expectations into our projections. If you’d like to update your financial plan, please don’t hesitate to reach out to your advisor.