“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett
It was all quiet on the western front until yesterday. As a wealth adviser it can be a struggle to get in touch with your clients in late summer when markets have been roaring to double digit returns.
That all changed yesterday. Suddenly clients, friends, and folks I haven’t spoken to in years were calling, texting, and emailing. They were asking questions like:
“Are we heading for trouble? Should we be worried? What are you thinking? Is now a buying opportunity, etc., etc., etc.?”
Yesterday August 14th was the worst day for the markets in 2019 so far. There were massive selloffs in stocks mostly attributed to fear of oncoming recession in the US and globally. This fear was predominantly sparked from an inversion in the treasury yield curve.
What’s an Inverted Yield Curve?
An inverted yield curve is when the yield on a longer-term bond is lower than that of a shorter-term bond. In the case of yesterday, the 2-year treasury note had a higher yield than the 10-year note. Historically an inverted yield curve has predated recessions. (yield equals the return an investor should realize on a bond… longer-term treasury bonds should have higher interest rates and higher yields)
While inverted yield curves have always predated recessions, recessions haven’t always followed inverted yield curves. In some instances when recession did follow the inversion, it didn’t occur for over 2 years after. How predictive was that? That’s like me saying “I expect a recession to occur in the next 5 years.” It’s a pretty big strike zone.
The yield curve is a better economic indicator when comparing the 2-year note and 30-year bond or the 10-year note and the 30-year bond. Historically that has been significantly more predictive than the 2 vs 10-year. Economics is soft science not hard science, which means the data is always open to interpretation.
Investors need to be very careful not to fall into herd mentality. Following the herd will lead to trouble. The herd is rarely right when it comes to markets. The current headlines look like classic herd mentality to me. Suddenly it seems very vogue to be dour on the global economy and the markets.
There is something about human psychology that makes us want to give more credibility and deference to negative and gloomy people. However when it comes to the stocks, the always negative people are statistically wrong more than they are right, and they are wrong by a wider margin.
– Wyatt Swartz
– 8/15/2019
Vanguard Total World Stock ETF (VT): -9.76%
The global stock market saw a return of volatility in 2018. Markets started out strong in January climbing to high reached on Jan 26th. The Jan 26th high was followed by a correction -10.62% correction. Markets would never recover back to that Jan 26th high. Volatility remained very high and in Sept another major selloff in markets began and we had the second correction of the year -11.49%. Markets stabilized a bit over October and November only to experience another major selloff beginning in December of -13.13% before they started to regain some. If you look at the decrease in markets beginning in Sept through Dec as one movement rather than two separate corrections, then there was a -19.49% drop in markets. The technical definition of a bear market is -20%. Whether you look at 2019 as a return to volatility with 3 corrections or as a mini bear market I don’t think you are wrong. Either way, 2019 was a reset to markets which brought stocks back to healthier levels for future positive returns.
VT Historical Returns:
- 2009: +32.65% 2014: +3.67%
- 2010: +13.08% 2015: -1.86%
- 2011: -7.50% 2016: +8.51%
- 2012: +17.12% 2017: +24.49%
- 2013: +22.95% 2018: -9.76%
2018 Performance for Notable Index ETFs:
- SPDR S&P 500 ETF (SPY): -4.56%
- iShares MSCI EAFE ETF (EFA): -13.81%
- iShares MSCI Emerging Markets ETF (EEM): -15.31%
- iShares Core US Aggregate Bond ETF (AGG): +0.10%
W. Swartz & Co., LLC – Managed Strategies
WSTR: -9.53% (after fees)
- What hurt performance? – Portfolio was overweight international developed market stocks which significantly lagged US stocks as seen above.
- What helped performance? – 15% of the portfolio was held in individual stocks which had a positive overall return. Further evidence that individual security selection is one way to create alpha in a portfolio.
BRAVO: -9.26% (after fees)
- What hurt performance? – The portfolio was still too closely mirroring the benchmark to have any real outperformance after 1% annual management fees were taken into account.
- What helped performance? – An underweight to emerging markets which was the worst performing major category of stocks.
Fixed Income: -1.17% (after fees)
- What hurt performance? – An overweight to global bonds and to high yield.
Individual Stocks Holdings: +2.92% (after fees)
- What helped performance? – 15 equally weighted stocks proved to be significantly different than the greater market especially during downward macro movements.
- AbbVie Inc (ABBV), Alphabet Inc (GOOGL), Amazon.com Inc (AMZN), Anheuser-Busch InBev (BUD), Bank of America Corp. (BAC), Boeing Co. (BA), Bristol-Myers Squibb Co. (BMY), Walt Disney Co. (DIS), Kroger Co. (KR), Microsoft Corp. (MSFT), Novartis (NVS), Thermo Fisher Scientific (TMO), 3M Co. (MMM), JP Morgan Chase (JPM), CVS Health Corp (CVS)
Wyatt Swartz
January 24th, 2019