Q4 2018 Year End Market Update

Monday 1/28/19

Dear Clients, Friends and Colleagues,

The last couple of months of 2018 were especially painful for many investors on Wall Street as the “Liquidity Drain” continued. As a reminder, the Federal Reserve Bank has an ongoing “Renormalization” of its Balance Sheet, which is effectively a “Quantitative Tightening” and a draining of Liquidity out of the markets. For anyone that has been following my posts on LinkedIn, you would have seen this building as the dominos lined up for their eventual fall. In my opinion we are just scratching the surface so far of what is yet still to come with much more volatility paired with a downward bias through 2019. The full knock-on effects are still yet to be felt, as is the pending Recession/Depression which will finally culminate in the financial/economic reset that has been delayed since 2008 when Companies were “Bailed Out”. Rates were also going higher, running up financing and servicing costs of existing “Historical” amounts of debt at all levels of the economy, while the “Yield Curve Inversion” is now a mirror image of August 2007 just before all hell broke loose.

At the end of the day, as I have said many times before, it all comes down to Central Banker actions around the Globe. That’s It!!!! Jerome Powell has already stated that he “may” pause the Rate Hikes, coupled with the Wall Street Journal article on Friday 12/25/19 (which made a case for the potential pause of the “Balance Sheet Runoff”) and of course an about face of the Central Bank Liquidity in the markets.

One look at the chart below and you can see exactly why markets have been rallying since Christmas:

S&P 500 Index Graph, Global Central Bank Balance Sheet Graph

S&P 500 Index Vs. Global Central Bank Money Supply.

However, company “Earnings Revisions” lower and US Macro Data may have something to say about that:

S&P 500 Index Graph, S&P 500 Fwd EPS Graph, US Macro Economic Data Graph

S&P 500 Index Vs. S&P 500 Forward Earnings Per Share Revisions & US Macro Economic Data

Which one will win out in the end? My guess is that much Longer Term forces are at play and that they are the determining factor in the end (Look at the peaks and troughs of the S&P 500 Vs. the Shiller CAPE Ratio):

S&P 500 Index Graph, Shiller CAPE Ratio Graph

Shiller CAPE Ratio higher than 1929. Only 2000 was it ever higher.

Does 1929 ring any Bells? Especially when none other than Morgan Stanley is now preaching what I have been warning about since the end of 2014. That is to expect an “L” shaped recovery in the next crash, not a “V” shaped recovery. (i.e. Global Depression with no recovery). Here is a Long Term Chart of the Broad US Markets “VLG”. By definition it represents what your “Average Investors Portfolio” performance would be. It is an equal weighted Index of about 1850 stocks across the Broad US Economy and therefore a more accurate representation of the “Full Market Environment”.

Value Line Geometric Index Graph, False Breakout

Value Line Geometric Composite Index: Multi-Decade Triple Top False Breakout??

As you will notice on this chart, after the “Sugar High” effects of 2017 wore off, it is now much lower than where it was at the end of 2014.

In addition, there is an old saying on Wall Street: “When everyone else is Greedy, Be Fearful and when everyone else is Fearful , Be Greedy”. It is a “Contrarian Mantra”, but true to its core and also something that I adhere to. So for all of those poor souls who did not heed this warning and clamored into the Tech Bubble on “Hope & Euphoria” jn late 2017 & early 2018, there is only one thing that remains constant. “What the Market Giveth, the Market also Taketh Away” as you can see in the FAANG (Facebook, Amazon, Apple, Netflix, Google) Chart below:

FAANG Chart, Head & Shoulders Forming.

FAANG (Facebook, Amazon, Apple, Netflix, Google) Chart back to May 2016 levels.

Therefore, it would appear that I have been correct in my views since the end of 2014 and indeed that the worst may still be yet to come….

S&P 500 Index, 2007 - 2009 Analog Chart

S&P 500 Index 2018 Vs. 2007 – 2009 Comparative Analog Chart. Will history Repeat or just Rhyme??

For our client’s, you can keep your chin up in this all-consuming environment of concern and risk. As you recall we now offer 5 different “Model Funds” for our clients to choose from. In 2018 all 5 Model Funds Outperformed the Broad US Markets on average by between +9.38% to +15.68%. The 3 of those Model Funds that were started on 8/1/17 have also all outperformed the Broad US Markets on average over their “Lifetime” to 2018 year end by between +5.15% to +10.06%. (If you would like me to email you the “Model Breakdown File” or the “2018 & Lifetime Performance Graph File” just let me know).
We do what we say and we say what we mean: “Invest for Growth, Protect from Losses, Returns will take care of themselves”. (Think about that in the context of “Full Market Cycles” and how many decades it can sometimes take just to get “back to even”).

Real S&P 500 Total Return Graph. Getting back to even, Buy & Hold

Real (Inflation Adjusted) S&P 500 Total Return and the time it takes to “Get back to even” using the “Wall Street Buy & Hold” Fallacy… i.e. Note that the markets have historically spent approx. 95% of their time just trying to make back previous losses…

As a side note, we have been re-invested again since the Christmas lows and enjoying growth over the last few weeks as you can see in the graphs below. Performance through Year End 12/31/2018. Our Models are in Orange, Broad US Markets are in Gray.

Conservative “Total Return Income” Model since 8/1/17, -2.35%: (Broad US Markets VLGI in Gray, -12.41%)

Beat the market, Value Line Geometric Index, VLG, Conservative Model Fund, Total Return Income Model Fund.

Conservative “Total Return Income” Model since 8/1/17, -2.35%: (Broad US Markets VLGI in Gray, -12.41%)

 

Moderate “Global Opportunity” Model since 8/1/17, -4.59%: (Broad US Markets VLGI in Gray, -12.41%)

Beat the market, Value Line Geometric Index, VLG, Moderate Model Fund, Global Opportunity Model Fund

Moderate “Global Opportunity” Model since 8/1/17. -4.59%: (Broad US Markets VLGI in Gray, -12.41%)

 

Aggressive “100% International Equities” Model since 8/1/18, -6.50%: (Broad US Markets VLGI in Gray, -18.59%)

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% International Equities Model Fund

Aggressive “100% International Equities” Model since 8/1/18, -6.50%: (Broad US Markets VLGI in Gray, -18.59%)

 

Aggressive “100% US Equities” Model since 8/1/18, -2.91%: (Broad US Markets VLGI in Gray, -18.59%)

Beat the market, Value Line Geometric Index, VLG, Aggressive Model Fund, 100% US Equities Model Fund

Aggressive “100% US Equities” Model since 8/1/18, -2.91%: (Broad US Markets VLGI in Gray, -18.59%)

 

Contrarian “Long/Short All Weather” Model since 8/1/17, -7.26%: (Broad US Markets VLGI in Gray, -12.41%)

 

Beat the market, Long/Short, All Weather Fund, Value Line Geometric Index, VLG, Contrarian Model Fund, Long/Short All Weather Contrarian Model Fund

Contrarian “Long/Short All Weather” Model since 8/1/17, -7.26%: (Broad US Markets VLGI in Gray, -12.41%)

 

Although, I am expecting this current rally to run out of steam soon and the next “Leg Lower” to follow.

Let me know if you have any questions.

Talk soon,

Cory Reader
Chief Investment Officer
HK Wealth Management, Inc.

213-509-6544

Email: creader@hkwmanagement.com
Web: www.hkwmanagement.com

Past performance does not guarantee future results. All investments carry some degree of risk.

The Answer is: YES!

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