I was in Epcot on New Year’s Eve last week (I know I may need my head checked) and as I was sitting in England enjoying a Bass beer, I watched as a mid-40s man began yelling at a trash collector. He was screaming simply because there were no seats available. His meltdown lasted about 2-3 minutes, and then he seemed to come back to his senses, relent to the fact that the park was packed and that this was supposed to be the happiest place on earth.

 

What has amazed me for decades is to see similar fits take place on Wall Street. Group think takes over most often when motivated by fear or greed. Appropriate to cite our partner, Bill O’Neil, who often said, “the market is human nature on parade.”

 

When I wrote my 3rd quarter letter I really didn’t expect my comments about market declines to be that timely. But in the 4th quarter we saw the Dow decline -18.8% and the S&P 500 -19.7% (high to low). So by my count, since 1900 the market has now corrected 154 times. A correction is anywhere between -5% to -19.9%. That means the frequency is a little over once a year and interestingly the average length of recovery from the bottom is 4 months. We have 118 years of data that suggest people freak out, hit the panic button, and then regret the decision 4 months later. And despite all of this information, why do investors continue to fall into this pattern? It’s because they fear things will worsen.

 

20 times since 1900 markets went beyond -19.9% and fell into bear markets. Bear markets last longer and decline more. The key, as I mentioned three months ago, is differentiating between the two. Two dimensions that we find very useful in making that decision when prices decline like this is macro-economic data and valuation measures. Together they make up 50% of our market forecast and right now both are ok. On the macro front: jobs - good; GDP - good; inflation - good; industrial production - good. On the valuation front: everything is better after the decline; comparing the market to alternatives like bonds – good; P/E multiples - better. Our view of the market right now is one that looks like 2011 or 2015. If the Fed slows and if the U.S. makes a deal with China, the bulls could even be let loose. Take a look at the table below for some additional comparisons.

 

 

We, of course, are data dependent. We measure daily and adjust if needed along the way. But, as of now, we are optimistic about market gains in 2019. Indicators are betting that this correction is more like the temper tantrum in Disney... burning hot and then recovering to recognize the economy is good and prices are reasonable.

 

Let’s say good bye to 2018 – a year of digesting previous gains, a year where cash was king and nothing made money – bonds, stocks, alternatives nor commodities. I’m proud that our flagship tactical strategies delivered a market-beating result but it’s hard to be enthusiastic when other strategies struggled. As always, thank you for your business and best wishes for a happy, healthy, and prosperous 2019.