Published December 28, 2018
In January of this year, no one would have guessed it would end like this. Stocks began the year ripping higher for six consecutive weeks in what appears in hindsight to have been the “blow off top” of this bull run. It felt that way at the time at least, with investors seeming to be in full “fear of missing out” mode. February brought a sharp give back of those January gains – a cold but constructive blast of cold water on the overheated stock market. However the bulls weren’t finished. Stocks began rising again through the spring and summer, fueled in part by a corporate tax cut that padded already blossoming corporate profits. It’s important to note that stocks were rising despite a year filled with ongoing trade tariff concerns, mid-term election uncertainty, and rising interest rates. All of those storylines were well in place throughout much of the year. Through the first nine months of the year, none of those items mattered as the stock market preferred to focus on surging corporate profits. That all changed in October. While companies were reporting record earnings, stock investors looked into 2019 and became fearful that the earnings peak had arrived; it would be all downhill from there. Concerns of a recession in 2019/2020 came to the forefront of investor minds. Plunging oil prices helped fuel the concerns, even though much of the price decline was attributed to rising oil supply. The market narrative shifted from embracing tax cuts and record corporate profits to fears that slowing non-U.S. economic growth, in large part driven by China, would ripple through to the U.S. Adding to the angst was a Federal Reserve still raising short-term interest rates while longer-term rates were stuck in neutral – thus perhaps leading to the much-feared yield curve inversion, where short-term rates are higher than longer-term rates. Such inversions often presage recessions, though sometimes with as much as an 18 month lead time. Stocks plunged in October and again in December, giving up all the gains made from January through September and going notably negative for the year as market volatility spiked higher. Investors exited the year worried that the long bull run from 2009 had come to an end.
By contrast, here at TimingCube, we could not be happier with 2018. After years of chasing a nonstop upward march in stocks, which admittedly offers us little opportunity to outperform, the market finally gave us a chance to shine. See below the performance of our TimingCube Turbo Model (blue line) compared to our focus Nasdaq 100 index (traded under the symbol QQQ). Our modest lead in performance through the first nine months of the year exploded as stocks plunged in October and again in December … leaving us over +30% better than the broad market.
More importantly, in our view, the substantially positive return in the face of a dismal year for stocks reaffirmed why we prefer our approach to investing – the ability to protect and grow our capital in the most damaging and dangerous of markets. Most any stock investing strategy will do well when the stock market is marching ever-higher. It’s the rare strategy that will also post gains, and hefty ones at that(!), when the stock market is acting sickly.
Stepping back further, we see the long-term benefits of our approach. The 2008 financial crisis came to an end with November’s action by the Federal Reserve to step into the market and buy bonds. Stocks hit their low a few months later. By then, our models had already delivered gains for us, and continued to do so as the rally built up. We underperformed the market on an annual basis during the middle of the rally years – e.g. 2012-2017. This year, as stocks fell apart, our model rose once again to protect our capital and offer us growth while other investment approaches foundered – just as it did in the dot.com collapse and financial crisis.
The absolute hardest part about investing is controlling our emotions in the face of serious stress; sticking with a proven strategy in the face of disappointing results. This month of December has delivered a steady drip of anxiety to investors. Have you reacted with emotion? Or have you stuck with your predefined strategy? If you implement our TimingCube signals faithfully over time, you have been rewarded in both good and bad market periods. We have not always beaten the market, nor avoided drawdowns. However, we do offer an approach to investing that has proven reliable over market cycles for 17 years now, in both good times and bad. Being a disciplined investor is the key to success, regardless of which strategy you choose. We think by removing the emotion from investing we have a better chance at success. We hope you have profited from our mechanically-generated market signals this year. To a happy and prosperous 2019!
After an extraordinarily bad week for stock investors, the few remaining bullish investors tried to rally the troops to take advantage of the low prices. They would not find many takers Monday as stocks delivered their worst Christmas Eve performance in market history – a -2.7% shellacking that was even more shocking when looking at the -4% drubbing in “safe haven” utilities, as investors shunned stocks of all sectors and stripes. Returning from the Christmas Day break, stocks finally staged an oversold bounce. The bears stepped aside and let the bulls run to a huge +5.0% rally. Record-breaking holiday sales for Amazon, which rose over +9% on the day, and MasterCard reporting the strongest holiday sales growth since 2011 helped refocus investors on solid fundamentals, at least for one day. Stocks gave back about 1/2 of that huge Wednesday rally in Thursday’s trade as investors chose to sell into the strength. However, technical buying once the S&P 500 slumped to 2400 sharply reversed the heavily negative day all the way to a +0.9% close. The massive market moves of the first three trading days of the week gave way to a relatively quiet session Friday. Stocks moved higher through much of the day, gaining +1% at the day’s peak, before pulling back to even at the day and weekly close, and ahead of what will essentially be a four-day market break (with markets open only on New Year’s Eve, which will certainly be a lightly traded session).
After a shattering week for stock market, bulls were able to regroup enough to drive stock prices higher on the S&P 500 (SPY) by +2.93% over the holiday-shortened week. The Nasdaq 100 (QQQ) added +3.96%, recouping about half of the prior week’s losses. The small-cap Russell 2000 (IWM) added a similar +3.50%.
Warm wishes and many happy returns for 2019!