Financial markets bounced back from a rough October to see gains across the board for the month of November. The S&P 500 gained +2.0% on the month and appears poised to end 2018 in positive territory for the tenth consecutive year, having gained +5.1% year-to-date. Overseas, stocks recovered as well with a gain of +1.0% during November as measured by the MSCI All Country World (ex-US) Index, though the YTD picture remains less rosy as the index has declined -10.1% YTD. Bonds gained +0.6% on the month per the Barclays US Aggregate Bond Index, which remains negative YTD at -1.8%.
On balance, a diversified portfolio comprised of 60% in global equities and 40% in fixed income would have gained +1.3% in November, though that same portfolio would be down -0.9% YTD. 2018 remains a tough year for any investment strategy with even a modicum of diversification outside of domestic equities, which begs the question for some: why would I own anything outside of US stocks? And for certain investors, we would not argue with this strategy, assuming the right circumstances, including an extremely long-term time horizon with the ability (both financial and psychological) to withstand potentially unlimited declines in portfolio value, along with the belief that the United States can thrive absent the success of the rest of the global economy.
However, for those of us who value risk management and downside protection in addition to capital appreciation, Archetype’s Three Dials investment philosophy exists to help navigate the ever-shifting market landscape and inform our asset allocation decisions across domestic and international equities, fixed income and commodities, and all asset classes in between. See below for the monthly update from our three primary indicators:
- Economic Fundamentals: Positive (unchanged from last month)
US GDP growth was unrevised by the Commerce Department in its second estimate in November, validating the advance estimate for Q3 of +3.5% real annualized growth. Furthermore, the most recent leading economic indicators from both the Conference Board and the Federal Reserve Bank of Philadelphia suggest that economic growth should remain strong into 2019. Overseas, the latest Reuters poll suggests that growth in the euro zone economy will pick up during Q4. As such, our Fundamental Dial continues to show a “Positive” reading.
- Market Sentiment and Momentum: Neutral (unchanged from last month)
As covered above and in previous writings, our Momentum Dial turned neutral during October as concerns over rate hikes and trade tensions brought about a wave of selling pressure and a breakdown of technical support levels. In November, buyers and sellers each struggled to gain the upper hand, leading to a choppy month of trading activity that ultimately ended on a positive note. This tug of war appears poised to continue as markets look to determine the direction of their next trend. Thus, our Momentum Dial remains in a “Neutral” reading.
- Valuation: Negative (unchanged from last month)
While not always the case, valuation often serves as a counterbalance to fundamental strength. Investors will pay a premium for outperforming assets, while those perceived as having weaker growth prospects tend to trade at discount prices. Many valuation metrics suggest that a variety of factors, including low interest rates and this prolonged bull market in equities, have pushed stock prices to a historically high level. Our Valuation Dial remains in “Negative” territory for the time being.
On a composite basis, our “Three Dials” are showing a “Moderate” or “Neutral” reading when it comes to risk appetite. Through we are entering a period of seasonal strength as evidenced from historical stock returns, sufficient risk remains on the horizon to prevent us from piling into equities at this time. Instead, we channel our inner Falstaff, who reminds us perhaps that discretion is the better part of valor.
Sources:
https://www.slickcharts.com/sp500/returns
https://www.bea.gov/news/2018/gross-domestic-product-third-quarter-2018-second-estimate-corporate-profits-third-quarter
https://www.conference-board.org/pdf_free/press/US%20LEI%20-%20Press%20Release%20NOVEMBER%202018.pdf
https://www.philadelphiafed.org/-/media/research-and-data/regional-economy/indexes/leading/2018/leadingindexes1018.pdf?la=en
https://www.reuters.com/article/us-eurozone-economy-poll/ecb-bond-buying-in-final-act-as-growth-to-bounce-back-reuters-poll-idUSKCN1NJ003
https://lplresearch.com/2018/11/30/time-for-santa/
