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STA Weekly Report – Despite the Current Equity Drawdown, Some Positives Emerge

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INSIDE THIS EDITION:

So, A 1000 Point Rally…Should We Be Impressed?
Weekly Snapshot of Global Asset Class Performance
401k Plan Manager  *Updated on 10/23/2018

Equity markets have just suffered through an atypical drawdown heading into the Christmas holiday. Atypical, because holiday cheer is often accompanied by lower trading volumes and oftentimes a “Santa Clause” rally. This year, in fact, has been the complete opposite.

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The performance numbers paint the picture of a December marked by a broad-based decline across sectors and asset classes and much higher volatility.

In December alone, through Christmas Eve, the S&P 500, Dow Jones, and Nasdaq each declined approximately 15%. The Russell 2000, fared even worse with a decline of about 17%. Crude oil similarly continued to slide through December, giving up 16% after already posting price declines for much of the prior three months. Big banks like Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan, and Bank of America lost anywhere between 17 and 24 percent. Technology stocks, which through the first half of the year were the main driver of broad market performance, gave much of it back with Amazon leading the decline as it lost nearly 21% of its value.

All told, through the end of trading on Christmas Eve, the S&P 500 had fallen 19.7% from its peak, reached on September 20th. This mark put the broad domestic index just mere tenths of a percent away from bear market territory (bear markets are typically defined as a 20%+ decline). 

Unfortunately, such broad based negative returns can often make it hard for investors to realize that not all the news is bad. The headlines certainly don’t help either. As a result, we thought it might be useful to highlight three data points that provide a bit of a silver lining on a very difficult 2018 for investors. 

  1. Valuations are now more attractive than they were at the start of 2018 which means better expected future returns

That’s right. After the selloff in equities this year, we have seen valuations contract across domestic and international markets. The S&P 500 now trades at a Forward P/E of less than 14x, a contraction from 18x that it traded at when we started the year. As the chart also indicates, US equity valuations now look less elevated relative to peers than they have all year. This is good news for long-term investors as lower valuations typically signal higher expected returns.

2. Insiders are buying shares as stock prices decline further

Over the last two months, corporate executives and officers have doubled their open market share purchases. In fact, insider buying is outpacing selling by the widest margin since August 2011, in what looks to be a good sign for the broad equity market as higher share purchases from insiders signals confidence in stocks and the underlying fundamentals of publicly traded companies. In fact, the last time we saw a similar increase in insider buying, the S&P staged a 10% rally in two consecutive quarters after a dismal 19% decline.

 

3. Bear markets in equities don’t necessarily equate to recession

Source: Pension Partners

As the table above shows, not every 20% peak to trough decline in equities leads to an economic recession as defined by NBER. While there is always a risk that a recession could emerge, it is not a guarantee based on the historical record, and that is a silver lining especially in the context of recent data.

Let’s take retail data from this holiday season as an example. As the equity market declined from November 1st through December 24th, US retail sales, excluding automobiles, actually looks like they increased by 5.1% over the same period last year. This is according to data collected by Mastercard which tracks both online and offline spending during the busy holiday shopping season. Put in real dollars, this equates to holiday spending of more than $850B, and reflects main street’s consumer confidence, strong employment prospects, rising wages, and lower gas prices which if you ask anyone don’t exactly scream recession.

Of course, there is always a risk that negative equity performance can erode consumer confidence over time which would then bleed into the real economy. However, yesterday’s 5% recovery in equity markets, may go a long way to helping investors and consumers feel a little bit better as we head into 2019.

Weekly Technical Comment

So, A 1000 Point Rally…Should We Be Impressed?

Yesterday, the Dow jumped 1000 points from its 52-week low which, coincidentally, was also set yesterday. Never a dull moment. But, what does it mean?

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Looking at the weekly chart below, it means only a (small) recovery of the damage that has been done since the start of October when $INDU almost touched 27,000. However, it is nowhere near enough to change the structure of the market back to bullish.

The break below support at 23.500 last week confirmed the end of the series of higher highs followed by higher lows. This happened after a first serious warning signal was sent at the start of October when the market could not penetrate its previous high that was set in January.

That break opened up the way to a price target around 20.500 that can be derived by measuring the height of the range and projecting it below the breakout level. Any rally at the moment is expected to find resistance around 23.500, or maybe the range between 23.500 – 24.000.

This structure suggests that we have moved from a market where you could “Buy the dips” to a market where you may want to “Sell the rallies”.
I am not sure if a rally AFTER Christmas counts as a Santa rally but if it does we may want to “Sell the Santa rally.”

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

Written By: Scott Bishop, MBA, CPA/PFS, CFP®

The end of the year presents a unique opportunity to look at your overall personal financial planning situation.   With factors like the 2018 tax law changes, life changes or just working towards your goals, now is an especially important time to review things.  It is always a good time to see if you are  on-track at your stage in life. Taking what we now know about the new tax law and weaving together all of the other areas of your personal finances is one of the key ways we provide value to you as your trusted adviser. Below are some things we’d like to help you think through before the year ends.

Read Full Article Here



Important Disclosure

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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