When I prepare for this investor letter, I often pull various charts and data from our many resources, reviewing these for trends and information that will provide the spark needed to create something useful. It’s usually a helpful exercise.
Consider the following:
On December 6th, the US market hit a 90-year record for the number of consecutive days without a 3% correction. That was 273 days in a row. The global markets hit a record as well – the longest period in 30 years without a 5% correction. That was 369 days.
Imagine a bell curve, tracking the number of days before the start of a 3% or a 5% correction. We are here, in an outlier position, at our 90-year and 30-year records. Does that mean that when we do finally have a correction, it would potentially be more severe? I’m not talking about a bear market necessarily, just considering that at some point the pendulum will swing back the other way. What could trigger that change?
The Past 12 Months
2017 has been a very interesting year and, in spite of some of the divisiveness and extremism that we’ve seen socially and politically, it’s been a very good year. Of course, some significant change could occur before the end of the year, or even before we release this letter, but regardless, the results have surprised many who predicted a much more somber year.
After the November 2016 presidential election, we saw a bit of boom in industries that were expected to do very well under the fiscal policy expected from Washington. Sectors like energy, industrials, and consumer discretionary did very well for a short period of time. Then, growth areas like tech took over again. Following the Senate passing their version of tax reform, those companies that had done well post-election started to come back, and growth areas began to underperform.
As we moved through the year, managing through these rotations, we were able to pick up on opportunities that provided our investors, particularly those with plenty of exposure to equities, with enjoyable gains. Over the past few months, markets were up considerably over the previous quarter. This growth occurred despite a lack of significant legislative accomplishments, and without any huge legislative victories.
It’s easy to connect the dots between proposed tax reform and economic growth, and obvious that expectations are that this change will create another leg up in the economy. Lower taxes, especially for corporations, will help to drive earnings, as that alone – without even earning greater revenues – will create a boost to company financial statements.
A repeat of this year would be a very unusual occurrence. While we could continue to coast along positively, there may be some pent-up negativity that has yet to impact the markets. We know from past experience that when expectations are rosy, people begin to avoid looking at downside risk exposure. When complacency sets in, risk begins to rise.
There never seems to be a shortage of things to be concerned about. It’s our job to remain vigilant, to look for the small pieces of data that others may miss, the signals, trends, and information that tell us which way the wind is blowing and whether those distant waves will roll into shore.
Just because the number of days without a 3% correction is at a high, doesn’t mean that it can’t go higher. What if it kept going for another 180 days? We must not view one piece of data alone, and then apply that learning to all of our decisions. Taking a broad-based approach means synthesizing a great deal of information in order to understand when to take a risk, and when not to take a risk.
Usually, before a market falls, there is a loss of momentum across multiple factors under review. There are often enough warning signs ahead of really stiff corrections that allow us to mitigate risk. We don’t expect to be able to call the top – that’s akin to winning the lottery – but the next best thing is to recognize the signs that tell us when to start making changes, rather than riding a wave that has completely run out of steam.
We continually strive to take the emotion out of investment decisions. We are less concerned about sentiment and fear, things that impact short term decisions, than we are about the indicators and quantifiable information that tells us where to be in the markets over the long term.
At this time of year, however, we may get just a little bit sentimental, though in a different way. While this has been a great year for markets and portfolios, it has also been a year marked by upheaval and divisiveness. We wish for you and your loved ones a wonderful and kind holiday season, with hope that all, regardless of position on any issue of the day, can overcome those things that at times divide us, to come together and celebrate the season as one.
– Greg Stewart, CIO