INVESTMENT STRATEGY

Now that the worst December since the Great Depression is in the rear view mirror, investors are casting a wary eye towards what the new year will bring for financial markets. With many of the concerns from 2018 continuing into 2019, many investors are asking the question: is the worst yet to come?

Here are 2 key takeaways from late 2018 and our outlook for the start of 2019.

1. Nowhere to Hide

By the close of 2018, the slowing economic conditions that our models had been forecasting became a reality, as declines were felt around the globe and across investment categories. The year started with sluggish growth in China, Europe, and Japan, and by the 4th quarter the United States joined the march lower. The S&P 500 plunged -13.5% in the quarter and ended the year with a loss of -4.38%, marking only the second negative year since 2009.

The combination of deteriorating economic data, geopolitical fears, and monetary policy concerns caused a broad selloff across virtually all asset classes as seen in the chart below.

asset-total-return-2019

2. Diversification Hurt

In this challenging environment, diversification did not help investors. Standardized asset allocations, which do not make tactical adjustments, were left to bear the pain from exposure to some of the year’s worst performing assets such as international, emerging market stocks, commodities, and REITS.

The chart below illustrates how average portfolios with traditional asset allocations were hit in 2018. For example, an investor with a “balanced” objective, who would typically have a portfolio with 30% to 50% stocks averaged a -5.04% loss in 2018 according to Morningstar. Further, diversified retirement date portfolios (usually held in retirement plans) with a similar risk tolerance lost -7.42%.

diversification-hurt

Our Outlook: BEARISH

We maintain a negative outlook for the beginning of 2019 as economic growth shows signs of cooling. Despite the recent bounce from the stock market lows made in December, recent studies suggest there’s a high probability the market will experience a retracement and quite possibly even revisit the recent lows. During this volatile investment climate, we favor a conservative posture with a reduced risk profile.

Nevertheless, we will be mapping and measuring the “data,” which as part of our process, requires us to be open to a range of possibilities.  We are hopeful that we are starting to see the light at the end of the tunnel and therefore, looking forward to the potential investment opportunities 2019 may bring.

How Can We Help?

At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are prepared for what’s ahead, we recommend our complimentary portfolio checkup. Contact us today!