March 2018 - The Bull Finally Takes a Break

David L. Johanson |

SUMMARY

  • February takes a dip.
  • Tips to consider for 2018 investing.

February, normally a month of love, finally broke the Dow and S&P 500's win streak of 10 consecutive positive months.  This bullish streak was the longest since 1959.  We were actually due for a little break.

In last month’s newsletter, we wrote, "we would not be surprised if major markets declined by double digits from their peak a couple of weeks ago".  This prediction came true.  February had a stretch of 10 days where the market fell 10%.  Corrections are no fun.  They are like riding a rollercoaster with a blindfold.  You always wonder when it is going to bottom out and start upward again.

We also penned, "Ultimately though, we're betting that the pullback ends up being one to be bought, not sold".  Right again.  Time and time again any market setback has been quickly erased as bulls rush in to buy and push stocks back up.

There have been almost 60 "panic attacks" since the bull market started nine years ago according to noted economist, Ed Yardeni.  The markets hit new highs less than a month later.

Remember, the longest run that the stock market has experienced without a 20% decline was 4,494 days.  As we write, we’re a shade under 3,000 days without a 20% dip.  A so-called normal market is accustomed to this type of correction every 3.5 years on average.  These 20% corrections are common in bull markets.  We are confident 2018 will provide more volatility.  

We still see three positive tailwinds at the markets back:

  1. A weaker U.S. dollar will help U.S. companies compete better which will lead to stronger profits.
  1. Global synchronized growth.  Seldom have we seen global economies all thriving to such great extent.
  1. Global valuations still seem reasonable compared to bonds and cash.

Three headwinds on the radar include:

  1. The Federal Reserve Chair, Jerome Powell, is on schedule to raise interest rates this year.  This should create some unease.
  1. History tells us trade wars can be economic trouble.  President Trump’s decision to impose tariffs of 25% on imported steel and 10% on imported aluminum can cause some unintended consequences.
  1. Budget deficits are always a worry to us.  This will be a problem at some point.

Three Thoughts for the Remainder of 2018

  1. Making investment decisions during times of emotional duress is rarely profitable.  Keep your eye on corporate profits and not all of the media talking heads and political noise.  Profits look good.
  1. Dividends are on the rise.  More than one-fifth of the S&P 500 companies have boosted their dividends to shareholders so far this year.  These companies on average have hiked those dividends 14%.  These dividends have been brought on by some of the best earnings and sales reports in years.

The ultra-low volatility of last year has ended. Although it still makes sense to own stocks, a defensive equity income strategy might be smart at this point.Companies with less volatile earnings, which can lead to more stable income production and dividend protection, make sense to us going forward. Playing a little more defense, may benefit all of us.

  1. Robust economic activity could accelerate in a fashion that is more advantageous to Main Street than Wall Street.  Strong wage growth, particularly at the low end of the income spectrum should help middle America.

As always, we're honored and humbled that you have given us the opportunity to be a part of your lives and help you landscape your financial futures.  Please feel free to give us a call with any immediate questions or concerns.