Spring Market Update

“We are now in a bear market – here’s what that means.”

– CNBC headline on December 24, 2018

“The stock market rally to start 2019 is one for the history books.”

– CNBC headline on February 22, 2018

If you’re like most people, it’s probably not uncommon for you to plan your day or week based on the weather forecast. For example, you might check the forecast, see that it’s supposed to be sunny, and decide to go fishing on Saturday. But when Saturday rolls around, it starts to rain. The frustration you’d feel is very similar to how investors and analysts often feel about the markets. The forecast says one thing – and then the opposite happens. For example, let’s go back to the end of 2018. For months, the markets had been hammered by volatility. The Nasdaq entered bear market territory. Many pundits predicted even more volatility after the new year.

But four months later, the S&P 500 (SPX)[i] has hit a record high.

So, the question is: Why the change in direction? What’s behind this year’s market rally? And most importantly, what can we learn from it? The volatility that dominated the end of 2018 was largely due to fears of an economic slowdown. The Federal Reserve raised interest rates, which can cool both inflation and economic growth. Trade tensions with China showed no signs of stopping. Corporate earnings slowed down, oil prices had dropped, and several other indicators had many analysts predicting a recession in 2020 or 2021. Even after the turn of the year, there was some interesting data that, when compared with historical trends suggested more storms on the horizon. For example, you may have seen the term, “inverted yield curve” discussed in the financial media for a time. It is a complicated concept best described as when the yield on short-term Treasury Bonds rises higher than long-term Treasury Bonds. It doesn’t happen often, and historically it has been used to as a sign of an impending recession. The result of this signal had many investors feeling more pessimistic about the overall economy.

Despite this warning sign, the markets have enjoyed their strongest start to a year since 1998.

In many ways, this rally has been driven by something very simple: Nothing really got worse. The Federal Reserve has stopped raising interest rates, saying that it won’t raise them again in 2019 and as a result, utilities and bonds are doing better. The trade war with China seems to have hit a lull. And now, investors can point to a host of different historical trends that work in their favor. For example, some data suggests that when the stock market rises 13% or more “during the first three months of a calendar year,” it will gain even more before the end of the year.[ii] All these positive economic conditions don’t necessarily mean the good times are here to stay. Warren Buffett, the legendary investor, has a saying: “Be fearful when others are greedy and greedy when others are fearful.” While we shouldn’t take that too literally, it does illustrate an important point. Time after time, conditions that cause fear can change in an instant, leaving the fearful behind (as we have recently witnessed). On the other hand, conditions that stoke greed can shift before you know it, giving the greedy a nasty shock.

As your financial advisor, the reason I’m sending you this letter is because there are a few things I think we need to keep in mind as 2019 rolls on. First, we need to remember to guard against recency bias. Recency bias is when people make the mistake of thinking what happened recently is what happens usually. It’s why investors tend to panic during market volatility or take on unnecessary risk during a market rally. Second, remember that emotion is a good servant, but a bad master. Some of the biggest mistakes I have seen investors make have been because they are too emotional. Despite all of the downward and upward swings in the market, one thing hasn’t change. Domestic equities have continued to be the number one asset class with the most relative strength. International Equities and Commodities follow right behind and these are what we call “risk on” asset classes. Right now the offense is on the field with the more defensive asset classes holding less relative strength.

As always, I will continue to stay on top of the market, technical trends, and your portfolio. We plan on hosting another dinner seminar at Tria again on May 17^th where we discuss our investment philosophy and provide market commentary. If you or someone who may be interested in attending please give our office a call at 651-287-2160 and we will be sure to save a seat In the meantime, have a wonderful Spring!

Sincerely,

Bruce Carlson, CFP®

President

Carlson Asset Management