Not quite year-end review

by: , Chief Investment Officer and Managing Director | IndexIQ

“Life can only be understood backwards, but it must be lived forwards.”

Words of wisdom from the Danish philosopher, Soren Kierkegaard. Ditto the markets. So now that we’re closing in on the final days of 2018, we can start to try and make some sense of the year almost past.

To start: never a dull moment. Markets have grappled with tariffs and a potential trade war with China, rising interest rates, big swings in the price of oil, and political uncertainty in the run-up to the mid-term elections. But for all that, underlying economic growth remained strong. In spite of this, multiple asset classes have seen negative returns, including gold, bonds, and oil—an unusual circumstance. Stocks, as measured by the S&P 500, have been in and out of positive territory, most recently down -4.77% through December 18, 2018. Investors can be forgiven for feeling a little whipsawed.

One point that has been driven home yet again: the difficulty of making accurate, short-term market forecasts. The dollar has bounced around, with the Wall Street Journal Dollar Index starting the year at $85.62, declining to $83.53 in April, and then heading up, getting as high as $91.10 in November before dropping again. The Fed looked likely to continue its cycle of tightening well into next year, until it didn’t. Fed Chair Powell set off a serious rally when he indicated in a speech that the Fed’s benchmark rate of 2.0-2.25% was “just below” neutral, suggesting fewer rate increases for 2019 than investors had been expecting.

FAANG stocks, once everybody’s darlings, experienced a bear market, down over 20%. The S&P 500 went through two corrections—a decline of 10% or more from the highs—in the year. While corrections are common—since 1950 there have been 37, according to Yardeni Research, or, on average one about every 22 months—two in one year is more unusual.

Looking back, what can we conclude from all this? One point certainly is the persistence of mean reversion: periods of low volatility will be followed by the return of volatility; currencies will move up and down in relation to one another and to the dollar; the politics of the day will cause short-term dislocations but longer term, fundamentals matter more; and markets will reset based on underlying earnings and economic growth.

How and when all this will happen is not entirely knowable—a challenge that again serves to highlight basic principles. For example, volatility is not the same as permanent loss, but managing volatility can help individuals stay committed to an investment program and help improve long-term return potential. Market timing is hard, and counter-productive for most people. The Fed still matters. As of this writing, the economy is still growing—the December 18th GDPNow forecast from the Federal Reserve Bank of Atlanta was 2.9%—and many fundamentals like the unemployment rate and consumer spending are supportive of continued expansion.

Ten years into the economic recovery and the March 2009 market bottom, investors are understandably concerned about what the New Year will bring. Looking back 12 months from now, it will all be clear. In the meantime, it’s worth keeping in mind that this year and next, tools like liquid alternatives and 50%-hedged international equity funds will continue to provide an opportunity to stay invested while seeking to protect against the inevitable fluctuations in prices.

About risk

The S&P 500 Index is an American stock market index based on the market capitalizations of the 500 largest companies having common stock listed on the NYSE or NASDAQ.

The Wall Street Journal Dollar Index measures the value of the U.S dollar relative to 16 foreign currencies.

FAANG is an acronym used to collectively refer to tech stocks Facebook, Amazon, Apple, Netflix and Google.

Liquid alternatives are alternative investment strategies that are available through alternative investment vehicles such as mutual funds, ETFs, and closed-end funds that provide daily liquidity.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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