We live at the apex of human civilization. We carry trillions of bits of high-quality data in our pockets at all times. Despite these advantages, our decision-making process evolved little since our days as tribal “hunter-gathers.?
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When a client retires, we split their portfolio into three buckets: Risk Assets, Fixed Income, and Near Cash. We invest the client’s assets such that the Risk Bucket represents 60-70% of their portfolio, invested in faster growing but volatile US and international equities.
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In our December 2016 year end review we wrote, "No forecast now, no forecast until April. We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.
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In January 2016, we projected that the S&P 500 would gain 5% for the year, but we noted we would revisit that estimate in July. In July, noting that an earnings recession among US corporations was coming to an end, we elevated our forecast to 10%. For the full year, the S&P 500 rose 12.0%, so close enough. Full details of US and world Indexes are here.
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Between May 21st and August 25th, US stocks as defined by the S&P 500 slid by 12.4%, leaving the index down 5.4% on the year and down 2.3% over the last year. A correction is defined as a slide of 10% or more, while a bear market is a decline of 20% or more.
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We have the pleasure of spending quite a bit of time among the "1 percenters" - American families whose annual income exceeds $500K. Our favorite cocktail party question this summer is: "Given everything you've heard recently, do you think the stock market is up or down this year?"
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Two weeks ago, we wrote, "with US stocks up an incredible 79.5% from the March 9th, 2009 low, a pause or even a pullback is to be expected. Our forecast for the S&P 500 for all of 2010 is only 8%, so reason enough to be cautious 4 ½ months into the year."
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The S&P 500 rallied 73.2% from the March 9th, 2008 low through the recent peak and declined 6.9% since January 19th. This is a normal correction and similar to the 7% decline we saw last June 15th-July 10th.
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In the first week of March of this year, millions of Americans opened their February statements, saw that their accounts were down another 20% on the year after falling 38% in 2008, and sold out their stocks for good.
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August delivered a modestly positive month for stocks, which have been down 7 of the last 11 months since stocks peaked in October 2007.
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Of the dozens on economic reports we receive each month, many, particularly consumer and business confidence, were hitting lows not seen since the 1991 recession.
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The S&P 500 declined 9.1% since year end and the NASDAQ declined 14.2% over the same period. The 75% S&P 500/25% Lehman Government Bond Index lost 6.3% over the same period.
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From a near record close on October 31st, the S&P 500 plunged 6.1% QTD, mostly in the last 24 hours. Hardest hit are the financial service stocks, with notables such as Citigroup down 29.5% QTD, Merrill Lynch down 25.1%, Freddie Mac down 23.9% and two of our long time favorites AMBAC down 60.8% and MGIC Investment Corp down 42.2% QTD.
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The S&P 500 gained 2.0% in the 3rd quarter and is up 9.1% on the year. Looking at quarterly returns for the major US Indexes, it was a quiet three months for US stocks. Looking at the month by month returns - what a wild ride!
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One week ago, the Dow was at all-time highs, the S&P 500 and NASDAQ at six year highs and the S&P 500 was within a few percent of making a new all-time high.
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