This week our nation celebrates 242 years since our Declaration of Independence. We’ve been rather radical from the start, establishing rule by elected officials versus the aristocratic and wealthy, and thinking that thirteen still disparate colonies could defeat the British army. Many years later, although our representative democracy experiment now stands as a model for the world, we are still a nation and people full of surprises. The first half of 2018 is proof yet again of this unconventionality. After all, who was expecting a Presidential summit with North Korea, many Republicans defending the economic utility of trade tariffs, some Democrats criticizing them for it, and a twenty-eight year-old Democratic Socialist spending under $200,000 to unseat a high-profile, ten-term Congressional incumbent?
The numerous policy and political curveballs of 2018 have awakened most investors from the atypical, albeit rewarding, low-volatility market slumber of 2017. While the increasingly tech-heavy S&P 500 and NASDAQ posted first-half gains of 3% and 9%, many dividend-centric, historically defensive, and global trade dependent stock sectors are down 5% to 10%. Seven of the thirty Dow Jones components are down 13% or more year-to-date. The count climbs to eight if we include recently dropped Dow component, GE, which was dismissed after 111 years in the index.
The annual NCAA men’s basketball tournament, aptly referred to as “March Madness,” began with a bang this year. For the first time in tournament history, a number one seed lost to a sixteen seed. Specifically, the University of Maryland, Baltimore County Retrievers beat the top-ranked University of Virginia (UVA) Cavaliers by an astounding 20 points. The Retrievers’ victory was as improbable as the Cavaliers scoring five points in 0.9 seconds to beat University of Louisville just a few weeks prior. While a sad night for Woodmont’s resident UVA alumnus, and the 27% of all participating bracketologists who picked UVA to go all the way, it made for an exciting start to the tournament.
The basketball hysteria soon gave way to a different sort of “March Madness” – a brisk Wall Street sell-off. Even so the 8% correction from the March highs to lows, and four consecutive days of 2% or more swings, was rather mild by historical standards. The average intra-year peak to trough in the S&P 500 is 16%. And from late January to early February the S&P tumbled 12%. Investors, however, entered the year having grown accustomed to the limited volatility. It was also the first time in several years the F.A.N.G. (Facebook, Amazon, Netflix, and Google) stocks looked vulnerable, particularly as the scrutiny around Facebook data privacy intensified. With many retail and a surprising number of institutional investors (active and passive) having grown convinced that four stocks equalled a portfolio, the group’s rapid reversal had an outsized effect.
This past summer the Cleveland Indians captured the attention of baseball fans winning 22 consecutive games. This wasn’t the longest streak in Major League Baseball history, but a grand feat in the modern era. Other great sports streaks include The University of Connecticut women’s basketball team’s 111 consecutive wins. Going back a few years, the University of Oklahoma football team won 47 in a row. For us Vandy fans, there is the streak of 1,013 games in which someone on the men’s basketball team has made a three-point basket. We recognize this streak doesn’t involve victories, but we have learned to take what we can get.
In 2017, the S&P 500 was positive on a total return basis every single month, going 12 for 12. It was the first time ever for this calendar year feat! Up 22% in 2017, the Index’s winning streak stands at 14 months, nine consecutive quarters, and now nine years. The markets’ march higher has been rather astounding, especially considering all that has transpired globally over this period.
Overcoming a brief retreat in the first half of August, the stock market continued its march higher posting solid gains in the third quarter. Now up 14% and 22% for the year, the S&P 500 and NASDAQ seem to set new highs daily. The MSCI All-World international index is up 22% year-to-date. The strong international gains have been a welcome development for Woodmont given our steps in recent years to increase investment exposure to cheaper overseas stocks with appreciated U.S. dollars. Even the small-cap Russell 2000, which just six weeks ago was essentially flat for the year, is now up 11% year-to-date after a huge bounce on renewed enthusiasm for a successful tax reform bill.
In an attempt to convince Parliament to find compromise with the American Colonists, the British Statesman, William Pitt, declared “you cannot conquer America.” Pitt was one of a small faction to appreciate the resilience of Americans at the time. Of course, while he recognized the uniqueness of America, even Sir William probably would have stopped short of forecasting the 241 years of independence we celebrated this week. Similarly, few stock market observers have appreciated the resilience of the now nine-year old U.S. bull market, which just registered its seventh consecutive quarterly gain and is up three-fold from the 2009 bottom.