While the core focus for the Buttonwood Investment Policy Committee (IPC) revolves around positioning of assets for the various stages of economic cycles, secondarily we track technical indicators for the markets as well. This technical positioning played out in dramatic fashion in Q4 2018.
As Q3 2018 ended, the stock market was at new highs and we shifted from our ‘invest-cash’ to our ‘hold-cash’ pattern. (Changes like this generally happen three or four times per year.) Throughout the balance of 2018, the technical condition of the stock markets remained negative as each week resulted in new lows for the major stock market indices. By Christmas Even, the Russell 2000 had fallen more than 23% from the peak in early October, and our large cash and defensive positioning had an impressive impact; protecting investment assets.
As we mentioned in our December update, the declines in both Q1 and Q4 of 2018 brought about a change we feel is likely to be predominant in the markets for the foreseeable future. This is an increase in stock market volatility based on a change in investor views from ‘glass 1/2 full’ to ‘glass 1/2 empty.’
The Holiday shortened week of January 1, was the first week in months the major stock indices hadn’t set a new low. We shifted from ‘hold-cash’ to ‘invest-cash’ and much of the cash that had built up in Q4 was invested through a full rebalance.
For perspective, the major stock indices declined about 50% throughout the Great Recession of 2007-2009. In Q4 2018, we just lived through about 1/2 of that decline – we still have a fairly strong US economy and recession seems to be a year or more away. As 2018 ended, we felt the selloff in stocks made them look attractive relative to just about any other risk asset: The P/E ratio of the S&P 500 (using Bloomberg’s measure; based on 12-month trailing earnings from continuing operations) had fallen from a high of more than 23 in January 2018 to below the 60-year average of 16.9 by year end. Looking ahead at 2019, the S&P 500 was priced at about 14 times 1-year forward expected earnings. In summary, during 2018 the economy had grown about 3%, and stocks had fallen from an overvalued level to a level where they were historically cheap.
As we move forward we will continue to proactively seek opportunities while remaining focused on our long-term investment objective of achieving a more consistent rate of return over full economic cycles.
If you would like to explore the benefits of working with The Buttonwood Team as your Family CFO, contact us today at Info@ButtonwoodFG.com