2018 was an interesting year as most years are these days! On the international front, the first face to face meeting since the 1950's with the leader of North Korea took place; time will tell if it bears any fruit for the people of North Korea or reduces the nuclear threat for the world. In addition, China has changed their constitution to allow Xi Jinping to rule for life instead of ten years as previously permitted. This is likely to have unknown impacts, but it is not a good omen for creating an open and more democratic society. Imagine a president for life! Finally, the wonderful Thai cave rescue of the boys trapped by flood water, and the female Southwest pilot who safely landed the plane with one engine blown apart, are just some of the positive events that happened last year. Also, advances in the sciences and artificial intelligence are just too numerous to mention. Good things are happening - you just have to look for them!
On the investing front, the Morningstar broad index finished the year down -5.05%. Only the large cap growth sector had a gain at 2.94%, with the small caps sector losing -12.11%. Using the Dow Jones 30 Industrial Average (DJIA) as a measuring stick, you can get a picture of an overall boring year versus the wild ride we have been having since October of 2018. From the 10-3-18 high of 26,828.39 to the 23,327.46 year-end close, it feels like the bottom fell out. However, if you use the 1-2-18 open of 24,824.01 versus the 23,327.46 close, the market dropped only 1496.55 points, so not as much as the last quarter. If you add in the 3.48% approximate dividend yield for the DJIA, you get to add back 811.80 points, resulting in only a 684.75-point drop for the year. This shows two things: 1) you can get numbers to say almost anything; and 2) the market did indeed lose money last year. While this is frustrating, it is not unexpected expected (20% of the time the market is down for a given year) and it is the price we must pay to get the superior long term results we have enjoyed in the past and hope to enjoy in the future (the risk-reward relationship).
From an economic prospective, we have three things which make me optimistic for the next year. First is the tax cut effective in 2018; the US has been subsidizing the rest of the world with the highest tax rates at 40%. Canada's corporate tax rate is at 26%, Germany at 30%, Japan at 31%, and lastly Ireland at 12.5%. The U.S. was essentially telling capital, jobs, and innovation to leave the country and invest elsewhere! This is now corrected and “the playing field” has been made much more level; now, if you want to invent, build, or get a job, the US is as good as the rest of the world. Second is tariffs; the US had the lowest tariff in the world - we have now raised our tariffs and Mexico, Canada and Europe have all reduced theirs. If you google “Reuters, China, and Tariffs”, you will read that China has started reducing their tariffs and, if you dig a little deeper, you will see they have reduced it in three phases. As a result, it is extremely likely that we will not be having a trade war with China! We will have to see what happens with respect to the historic stealing of our intellectual property by China.
Lastly, let me mention the projected earnings growth of the S & P 500 index of large cap stocks. Using a forward PE (price to earnings) ratio -generally, the lower the ratio, the better-- the ratio is currently at 14+ and earnings growth is projected to be between 7% and 12%. Therefore, from an economic view point, the market probably has room to grow! Optimistically, the market should go slowly up, however, it rarely follows this pattern. It shot way ahead of itself early in 2018; only to fall back to reality at the end of the year! Going forward, it is almost impossible to predict where the market will go with near certainty. This is why we invest in well run companies with good balance sheets and invest for the long term! Almost all economic indicators are positive, and the latest jobs report was excellent. Still, all this is currently overshadowed by the government shutdown. My opinion: We have a problem at our southern border (I have relatives who live on the Texas border and they do not feel safe). The “wall” is only .0011% of the Federal budget, give the man the money and open the government!! Who knows it may also open a path for the Dreamers and help with the southern border issues.
In closing, a little house keeping! First, if you want a copy of our ADV (the document which describes who we are and how we run our business), please contact us and we will get you a copy. Also enclosed with this letter is a copy of our Privacy Agreement. We do not sell anyone your information and only release it to someone if you authorize us to do so, i.e. your CPA, or if it is necessary to conduct your business. The last item is to be aware if is that cybercrime is increasing at an alarming rate and to be very careful with what you click on in your e-mail or online. As usual Kathy, Keith, Bill and I thank you for the trust you place with us. If you have any questions, please call or write.
Willis Ashby, President and CFP®
Integra Financial, Inc.
References: 2018 Dow Jones Industrial Average Return
WSJ, First Trust, Reuters, Morningstar and MarketWatch.com