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Explanations of the 2018 year end charts

January 10, 2019

Last year the stock market’s activity can be broken into three parts. One part was a big run up in stock prices. The second was the quick and sharp drop during December. The third is whether the net annual results followed a “normal” trend of the year in toto. Here are some explanations.

  • While the stock market had a lot of action last year, the bond market was pretty quiet except for the Federal Reserve’s actions causing jumps in the short term Treasury rates. The long term rate, U.S. dollar and gold had minimal changes last year and not too great ten year changes. This shows stability in the markets. Some might call it stagnation or that there is not much growth. As far as I am concerned, stability is good. However, looking at these numbers does not seem to indicate the strong growing economy the Fed is suggesting. And if we don’t have indications of strong growth, it could portend some gloomy weather on the horizon. This small grouping doesn’t tell an entire story, but they are helpful in my discussions with financial planning clients – so in that regard they serve a valid purpose.
  • Sharp run ups create euphoria and an expectation they will continue. They are not normal, and there always will be some normalization. This normalization, and then some, took place is a two week period creating some alarm, but based on the people I spoke with, there was inaction, so while portfolios gave back its gains over the last year and a half, there did not seem to be any panic selling. I’ve written plenty about staying the course of your investment plan and the sudden drop did not look like it was anything so terrible to cause an abandonment of well thought out plans.
  • The 2018 drops in the top three indexes and the double digit drop in the Russell 2000 when looked at through a 365 day lens should not cause too much alarm. The markets cannot be expected to go up every year and over the last ten years we only had three down years and even these were not so terrible. What was terrible was its suddenness.
  • The ten year results for all four indexes were all exceptional. Three showed similar and very significant increases and the fourth was off the wall but it included the FANGs that went up significantly. The FANGs are Facebook, Amazon, Netflix and Google (Alphabet). The FANG prices seem to be primarily based on great expectations of future earnings rather than current or projected next year earnings.
  • The ten year results were great but they had a low starting point coming after the midst of the 2008/2009 market meltdown. However, the annual increases after then were also quite high and with small losses in the loss years, it seemed it would have been hard for anyone to have lost money in the market during the last ten years, no matter when they started. However, if they entered the market during the last few months of 2018, they would not be too happy right now. But people in the market should be taking a long term position on the future of the American economy and while their starting point hit a glitch, it should work itself out over the next seven to ten years.
  • This presents an argument about whether the stock market would actually reflect the economy’s growth. The P/E of the S&P 500 index with exception of some annual aberrations has been pretty steady during the last ten years as has been the DJIA. There doesn’t appear to have been any major changes in those index’ valuations. Further the dividend yields have been pretty consistent over all and the dividend payout percent seems to indicate some consistency. All of these indicate stability in the market and that the prices are driven somewhat by profits and dividends. This provides me with confidence in the market as of the present time.
  • This year I added the dividend payout percent. This indicates the percentage of earnings that are paid as dividends and looks to me like there is an upward drift in the dividends paid out. This is buoyed by the increasing profits and cash hoards by many of the larger companies. Last year’s corporate tax cut further increased the cash with many companies using the cash to buy back shares which serve to increase the P/E ratios because fewer shares end up being outstanding.
  • One comment about the American economy’s growth being reflected in the stock market: The stock market also reflects global economic activity since about 43 percent of the sales of the S&P 500 components are derived from outside the United States, so that index also reflects worldwide business activity. Because of this, I do not see the efficacy of balancing a portfolio by including foreign or emerging market funds.

I can go on with more, but I believe I’ve said enough to provide an understanding of the performance indicated by the charts. Obviously I like doing this. I also like presenting this explanation since it forces me, and hopefully you too, to really focus in on the results and how they might be used.

Enjoy the above. Thank you for reading my blogs; and I welcome your thoughts and comments, so email me at emendlowitz@withum.com and include your phone number so I can call to discuss it with you.

Have a great year. Ed Mendlowitz

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