Market Commentary Q1 2019

By: Matt Garrott

2019 is off to a hot start as the S&P 500 gained 13.7%.  Will the market keep up this pace for the rest of the year?  It’s unlikely, but the “pace” is also a bit misleading.  We have not yet made up the ground lost in last quarter’s sell-off.  This is setting up to be a good calendar year, but the market is at about the same place it was six months ago.  On Christmas Eve we were on the cusp of a bear market.  Today, the media is back to searching for the downside of an upward trend.

It has been 10 years since the bottom of the Great Financial Crisis.  The S&P 500 gained over 400%, including dividends, for an annualized return of 17.6%.  The numbers don’t tell the whole story.  While the total return sounds great, the first three years of that rally were spent just getting back to zero.  The S&P 500 had lost half its value and needed a return of over 100% just to recover.  A moderate portfolio would have recovered in about half the time, but the early years of the rally were not easy for anyone, regardless of asset allocation.  Negativity was the baseline.

There were five drawdowns of at least 10% during the rally, each one accompanied by worry-mongers warning of impending doom.  A moderate portfolio might have only experienced two 10% drawdowns during that time, but it would have been difficult to avoid a media that cheers for volatility.  The key to success was staying true to a financial plan instead of giving in to the constant chorus telling investors to do something, anything.

As with crises in the past, the Great Financial Crisis gave birth to all sorts of backward-looking financial products, engineered to avoid losses that already happened.  All that engineering isn’t cheap.  Although they only make up 15% of the investment industry’s global assets, alternatives soak up 43% of the industry’s revenues.  Too often, money managers are launching new alternative investment products not because they have identified some edge, but because “that’s where the money is”, to paraphrase the famous bank robber.  We remain skeptical of over-complicated and illiquid financial products, particularly when accompanied by high expenses.

Looking back over the past ten years, investors that followed their financial plan should be proud of their progress.  For today, we can appreciate not only the upside of the last decade, but how difficult it was to stay disciplined in the face of uncertainty.  Soon enough, these years will seem like the good old days when it was easy to make money investing.

Fairway Scorecard 3-31-2019