It has been an interesting year so far, to say the least. We are only a few weeks into 2018 and the markets are experiencing remarkable volatility. January saw equities soar to new highs at a break-neck pace, only to retrace even faster over recent days.
Yesterday’s decline saw the Dow Jones Industrial Index lose over 1175 points, while the S&P 500 Index (the S&P) lost over 113 points. It’s jarring to see such a daily loss, the largest point loss in the history of the Dow in a single day.
However, with perspective we see that all is not ‘gloom and doom’. As of yesterday’s, close, the S&P is down 7.79% from its recent January highs. But consider that the index is still up over 26% since November 2016, a mere 14-month range. As a matter of fact, after yesterday’s close, the S&P is still trading above where it was only 4 weeks ago.
Pundits are debating the cause of the volatility over the past few days. Earnings have been positive overall for several companies, but large behemoths such as Apple and Wells Fargo issued weaker-than-expected earnings forecasts. Bond yields have risen sharply, and many investors are skittish that the Fed will raise rates too rapidly. Treasury Yields have risen. Rising interest rates would certainly cause many investors to move to fixed income, while also increasing borrowing costs for corporations. Some ‘experts’ have pointed to the State of The Union Address as being the catalyst for the market pull-back, specifically when President Trump called on Congress to advance $1.5 trillion toward infrastructure. Combined with the recent tax cuts, many fear a severe and unhealthy deepening of US debt. Others believe the market was simply due for a ‘cooling off’ from the latest unprecedented levels in the wake of the new tax legislation, which makes sense.
It remains to be seen whether this recent volatility will be short-lived, or whether it is the beginning of a true negative trend. As our investors know, we maintain an allocation discipline based on price-momentum indicators. As you’ll note from the chart below, the 10 Week Moving Average of the S&P (the green line) is still trending well above the 50 Week Moving Average (the red line).
If the current market volatility is short term, the 10 Week will likely continue to trend above the 50 Week, and we will maintain our equity positions. However, if a true negative trend is in play, we will exit or lighten equity positions when the 10 Week crosses and confirms below the 50 Week. Our exit strategy is firmly established, and we will not hesitate to ‘move to the sidelines’ when appropriate.
We continue to monitor and evaluate our allocations, maintaining best-of-peer positions in broadly diversified categories. We also continue to monitor our price momentum indicators should an exit become warranted. Furthermore, for certain accredited investors, we manage alternative investments that are non-correlated to fluctuating equity markets or asset prices, which may be suitable for a portion of their particular investment portfolios. We believe an expanded allocation between diversified marketable securities (with an exit strategy) and non-correlated alternatives (if suitable) is a sound approach for this investment environment.
As always, please never hesitate to call us with any questions or comments. Have a great rest of your week.
viewpointsObservations and Updates from CCA
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