2018 was a trip, eh? The past year brought us our first bear market in stocks in a decade, and a continuation of a bond bear market (though more subtle than the one that hit the stock market) that began back in 2016. As I thought about key investment trends and themes heading into 2019, it occurred to me that they had one thing in common: they all begin with the letter T. Here They are:
Tariffs: This is the market’s current obsession, and with good reason. Decades of benign disagreements about trade policy between the U.S. and China, Asia, Europe, and just about everywhere else in the developed world have gone from push to shove. This year is likely to bring some resolution, and I don’t mean the New Year’s kind. That will cause markets to react, one way or the other — and probably both.
Treasuries: The only reason that the bond markets are not a bigger headline for investors is because the stock market is grabbing all of the attention. But once the stock market bear becomes more mature, the focus will turn to the trouble in bonds. U.S. Treasuries are saving 60/40 and other balanced-type investors from much steeper losses. But corporations have a ton of debt, as do consumers. Frankly, so does the U.S. government, but they can print money to push their problems further into the future. For the other major segments of the economy, not so much. This will likely add to the simmering pressure on high yield and other corporate bonds.
Traders: I assume I have a lot of company in this regard. What I learned in my first 25 years in the investment business about how stock market investing worked has had to completely evolve and adjust over the past few years.
JP Morgan Reported in 2017 that about 90% of daily trading volume for the stock market is driven by entities that don’t really care about what they are investing in.
OK, maybe that’s a bit harsh, but let’s face it: high-frequency traders and their quantitative algorithms are not diving into corporate income statements before they flip in and out of stocks in seconds. And index ETFs are buying what is in the index they track, nothing more or less. This is not something to fear, but rather to adjust to. In 2018, this became very obvious amid the 500-to-1,000-point swings in the Dow Jones Industrial Average.
Technology: The tech sector has carried the stock market like it did back in the 1990s. The two periods are similar in many ways. Tech will likely lead the decline or lead the recovery. That means that investors who are heavily positioned in Nasdaq stocks, particularly the vaunted FAANG stocks, should be on high alert.
(FAANG: Facebook (FB – Get Report) , Amazon (AMZN – Get Report) , Apple (AAPL – Get Report) , Netflix (NFLX – Get Report) and Alphabet/Google (GOOGL – Get Report) .)
Tactical: How does one respond to the impact of newfangled trading entities as I discussed above? For me, it has been a matter of shifting the mix toward more tactical investing, whereby I hope to buy something for long-term purposes but have tightened my selling criteria. This inevitably leads to shorter average holding periods, but not to weaker tax-efficiency, since I am a long-short investor.
So, gains and losses are typically occurring simultaneously throughout the year. There is less need for the kind of programmed tax-loss harvesting I see some of the big robo-advisers and others touting lately.
Regardless of the tax angle on this, the reality is that long-term returns are increasingly accumulated in smaller bits along the way. You can either complain about increased volatility or you can use it to your advantage. Sign me up for the latter.
Technicals: My late father, Carl Isbitts, taught me to chart stocks when I was 16 years old. That skill has never been more helpful than it is now. I could write an entire article on why, but suffice it to say that those who can read, analyze and interpret stock price patterns have a big leg up in the evolved financial markets of 2019 and beyond.
Trump: Love him, hate him or don’t care. It does not matter. When someone can move markets with a tweet or change long-standing dynamics and debates concerning policy — and is under investigation for multiple matters — you have a market-influencing situation. Let’s see what 2019 brings on those fronts.
Twenty-twenty (the year 2020): Continuing with my least favorite but increasingly necessary market-moving factor (politics), remember that the U.S. House of Representatives is now in the hands of the Democrats. Furthermore, many members of that body and the Senate are angling toward running for president next year. That makes Washington, D.C. events and antics a continued threat and opportunity for investors.
Tools: The bottom line about all of this is that stocks, bonds, cash and commodities are all simply tools to get what you want out of your accumulated wealth. Whatever combination of preservation, income and growth you seek, these are simply the means to that end. Keep this front-of-mind in 2019, in combination with the other nine T words listed here. Investing has changed, it will continue to change, and that will create outsized opportunities for those who evolve with it. I wish you the best of all things in 2019!
Facebook, Apple, Alphabet and Amazon are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.
About the author: Rob Isbitts is the Chief Investment Officer of Sungarden Fund Management, the subadvisor to a long-short mutual fund (DNDHX) and the founder of Sungarden Investment Research, an investment management and equity research firm. Over the past three decades, he has managed daily liquid portfolios through diverse market conditions, and created several investment strategies, including the Sungarden Hedged Dividend portfolio, an alternative approach to the pursuit of income, preservation and long-term growth. He has written two books and hundreds of articles on investing. He can be followed on Twitter at @robisbitts. See his website at Sungardeninvestment.com. Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.