In the past, I’ve always put together a recorded screencast so that readers could follow my mouse and listen to me explain my way through charts, tables, and graphs.  If you’d rather watch the 20-minute video and listen to me talk at you with a cold as I lose my voice, click here!  At any rate, it seems easier to educate in this way, but we’ve received several requests to put our Market Outlook in written form as well, and since we work for our clients (not the other way around!), I present to you our first ever written version of our annual forecast.

First, let’s discuss the stock market. 

I saw the following table on, Twitter, then in a blog by Andrew Thrasher, a friend and Charles Dow Award winning portfolio manager in Indianapolis.  What you’re looking at is a year-by-year total of all the “down days” in the Dow each year.  So each bar below is a representation of the total for each year if you ignored all the up days and only added up each day that was down.

As you can see, 2017 was a record-setting year wherein the total cumulative down days added up to a ridiculously low -27.36%.  This is in comparison to the average at -90% and the prior record (set in 1965) of -31.45%.  Every other year listed below saw more than -38% in total cumulative down-day losses.

What does this mean?  It means that 2017 was one of the smoothest, least-volatile years in the history of the stock market.  We had zero “pullbacks” of -5% or more and with that said, nothing close to a “correction,” which is an average loss of -10% or more (and an occurrence that takes place once a year, on average).  No matter the propaganda on television, the fear mongering on CNBC, or even threats of nuclear attack could scare this market off its narrow, upward path.

Now let’s look at the stock market going forward… and I apologize for the antiquated, Microsoft DOS-looking “green screen” below, but I put this whole image/power point deck together yesterday while the market was open and wanted intra-day prices, which forced me to use my trading software for the following two images.

What you’re looking at here is a 1-year chart of the S&P 500.  Above, you can see the:

  1. 1-year trend is sloping up (gray line)
  2. 3-month trend is sloping up and is above the 1-year trend (blue line)
  3. 1-month trend is sloping up and is above the 3-month (red line)

These are all positive signs that add evidence that the path of least resistance is up at this point, so the market is telling us it’s in a positive trend.  There’s no denying that.

The potential negative I see on this chart, however, is the negative momentum divergence in the bottom pane.  If you look at the top of the chart where all the trendlines are, it’s easy to observe higher highs.  However if you look at the bottom pane (nerds note:  which represents RSI(14), a technical momentum indicator), you can see lower highs, which tells us that the momentum behind this run is starting to fizzle out.

Similar to the chart above, the one below is the Dow Jones Industrial Average.  Again, you can see below that the trend is obviously up, but just like the broader S&P 500 index, the narrower Dow is showing the same negative momentum divergence.

Not to beat a dead horse here, but the next chart (below) tells us a three-part story:

  1. Top Pane: The 1-year, 6-month, 3-month, and 1-month trends are all sloping positively and are layered in a positive manner.  Again, the trend is clearly up.
  2. Middle Pane: PMO is another momentum indicator, which is starting to roll over, which would indicate evidence of an approaching pullback or correction.  The vertical solid-blue and dotted-red lines represent positive and negative crossovers so that they’re easier to see on top of the price value of the S&P 500.
  3. Bottom Pane: RSI, another momentum indicator, shows negative divergence (as in the two previous charts, above), but it also shows no sign of entering into bearish territory over the last year (which would be a cross below 30).  This is again, a very bullish sign for stocks in the next 3-6 months.

Now let’s move on to interest rates and bonds.

The first chart we’ll look at is a chart that goes back almost 40 years. What you’re looking at is the 10-year Treasury note… so interest rates on 10-year Treasuries going back to the early 80’s.

Everyone knows that rates on mortgages, CD’s, and savings accounts were vastly different (higher) in the 80’s than they are today. This chart paints that picture. However, what it doesn’t tell us is the fact that, when interest rates fall, bond values increase. Conversely, when interest rates rise, bond values fall.

We’ve seen record low interest rates for years now and at some point – maybe this year, maybe two years from now – we’re going to see the tide change and interest rates will eventually rise, causing loss of principal in investors who own most bonds.

Speaking of bonds, let’s change gears and talk about them for a second. The bottoming process in interest rates is already starting to have a near-term effect on bonds. As you can see in the chart below, bonds rose steadily through the first half of 2016, then fell for the 2nd half of the year, giving up all the previous gains and then some… and since then, we’ve seen a choppy-flat trend to nowhere or what I’d call “no man’s land.”

The bottom line with bonds going forward is the need for investors to have their otherwise “safe, fixed income” investments watched more closely. I don’t see the next 10-30 years looking like the past, where it’s an inalienable right that one should expect an average return of 4-6% per year on bonds that are bought and held.

Next, let’s take a look at oil, which has gotten a lot of buzz lately, due to it’s positive run since this summer.  This is an 18 month chart and what I want you to focus on are these three things:

  1. Top Pane: Oil has been trading in a wide range for the last year and a half.  We saw a false breakout in summer of ’16, after which it fell and bounced off the bottom of that range, rose to the top-end of the range, and we see a false breakdown this past summer, after which it climbed to the top-end of the range again, where it sits today.
  2. Middle Pane: I see a positive crossover in PMO, but we’ll have to see if it prints a lower high – or instead, a more positive sign would be to see the 2018 PMO high surpass that of the November high.
  3. Bottom Pane: Momentum was largely bearish for the months prior to this past summer, but since then, we’ve seen a bullish sign in RSI (relative strength index), which is also a bullish sign for oil.

I’d like to see oil pullback to around $11.00 – 11.20 on the chart below, then breakout above $12.20 and hold for a few days before adding a position.  In addition, I’d want to see relative outperformance of oil to other investments (such as U.S. stocks, international stocks, etc.) before I’d invest.

Now let’s change gears and talk “big picture” before we close out this year’s outlook…

Andrew Thrasher found the chart below (via JPMorgan) and I found it interesting.  As the mortgage crisis was setting fire to the markets in 2008, the Federal Reserve decided to implement the largest economic “experiment” in history – flooding the market with printed money and expanding its balance sheet.

As you can see in the chart below, it worked.  As free money flew into the system (and interest rates were dropped to zero…for years), banks were able to fix their mistakes by recapitalizing on the backs of savers and investors.  In addition, those same investors couldn’t get the rates on CD’s and bonds that they were used to in the past, which caused an unnatural “flee to risky assets”  In other words, safe investors became risky investors…because they had to.

The last round of Quantitative Easing (QE3) ended a few years ago and as you can see, the market struggled for the first few years the printing press went cold.  Since late-2016/early-2017, the market has taken off like a rocket, and the big question here remains, “Will stocks be able to handle the Fed’s plan to start buying back those printed dollars as they unwind their balance sheet over the next few years?”  Time will tell, and this could definitely get very interesting.

Looking ahead into 2018, this month (January) tends to be a bad one in a mid-term election year. I subscribe to Stock Traders Almanac just for these types of historical statistics and as you can see below, in mid-term election years since 1950, the markets tend to perform pretty well for the first 4-5 trading days of the year, but then struggle to make gains through the end of the month.

While January tends to be a laggard month in a mid-term election year (above), the year as a whole is typically positive with single-digit gains at year-end.  The black line tells us that, even when we have a positive post-election year (i.e. – 2017), the mid-term election year seems relatively unaffected.  In other words, just because we have a good post-election year (which is normally the worst year of the four-year election cycle) doesn’t mean we revert to the mean in the following year.

Even more interesting is the fact that the market tends to struggle during the seasonally weak months (May thru October) and then we see an average gain of roughly 8%+ for the last three months of the year.  Pretty impressive and convincing statistics here, not to mention, a good piece of information for us to have in our back pocket!

If you’re a client then you’ve seen this chart several times in meetings, market commentary, screencasts, and videos.

  • Black Monday is on the far left, after which the market experienced its longest up-market in history (roughly 14 years).
  • Once the dot-com bubble burst, -47% of investor wealth was vaporized in the two years that followed.
  • The market climbed roughly 120%+ between March of 2002 and October of 2007.
  • The next 18 months brought a market crash spawned by the mortgage crisis, causing investors to lose -57% from peak to trough.

Since then, we’ve seen a head-fake / whipsaw in 2011 when the U.S. Treasury was downgraded.  Then we saw another, very rare double-whipsaw in 2015-16 as the market fell -12% and -14% twice over that 20-month period.  2017 taught us once again that it doesn’t matter who your President is or what the geopolitical threat du jour happens to be.  The market will do what it’s going to do, regardless of what anyone thinks.

The market crashes, on average, every seven years.  A “crash” is defined by a top-to-bottom drop of -20% or more and average crash is -42% (meaning half are better and half are worse).

This coming March will mark the 9th year of this 2nd longest bull market in history, going all the way back to the 1800’s.  As such, now is probably not the best time to be going “all-in” on your metaphorical long-term retirement black jack table.

In closing…

With all that being said, I think investors will always struggle, thanks to the news and media.  CNBC, Bloomberg, Fox Business… they’re all paid to get you to watch TV.  They want you glued to the next piece of “breaking news,” which, by the way, renders itself meaningless a mere 30 days later in the majority of cases.

While most investors wait until the market is close to a top before investing (and then wait till it’s almost at a bottom before selling), I think another issue is a lack of proper “Focus,” which is the theme at our office in 2018.

GO Banking Rates did a survey recently and found that the largest percentage of people who responded said that their number one BIGGEST REGRET in 2017 was “Not saving enough money.”  Not only was it the #1 regret – it was #1 by a long shot.  Look at #2.  Go figure, “Spending money on non-essentials.”  Do you think that might have a correlation with “Not saving enough?”  I’d even lump these two together.

You can take a look at the rest of the survey results yourself, but as an investor, you cannot control who the President of the United States is.  You cannot control what the unemployment or inflation rates are.  Newsflash!  I know this is going to be difficult to believe, but you cannot even control the stock, bond, commodity and currency markets!

All you CAN control is:

  1. How much you save, and
  2. How much you spend.

That’s it!

As for the market, investing, retirement planning, estate planning – leave that up to a professional and preferably, someone who is an active manager of money, watching the markets and your money on a daily basis.

…and that’s where we’ll end this year’s Market Outlook.  If you’re interested in getting a 2nd opinion on your retirement plan, please call or email us so that we can confidentially discuss you and/or your company’s situation further.

If you have any questions about retirement or estate planning, the market, or our patented Defense FirstTM portfolio management strategy, please reach out.  You don’t have to be a client to ask a question!

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Happy New Year!

Adam D. Koos, CFP®