For 2018, the global large cap portfolio closed out the year with a Net Asset Value of $215.28 USD per share. This compares to the 2017 year end value of $206.39 per share and produces a return, net of fees and expenses, of 4.3%.
Major market equity indexes were BATTERED in 2018. The S&P 500 fell 6.2%, the Dow dropped 5.6% and the Nasdaq Composite shed 3.9%, marking the worst annual performance for all three since 2008. A largely cyclical resource based index, the TSX composite from Canada, declined by a whopping 11.7% in that local currency (Canadian dollars). In 2018. the Canadian dollar fell by a further 7.2% against the US dollar, which exacerbated the currency adjusted loss.
An investment portfolio that produced a positive return for 2018 was a rarity indeed. On a relative basis, once again, the Gnostic portfolio demonstrated its mettle by besting the NASDAQ (the top performing US index) by a full 8.2%.
Recent data from manufacturing suggests a considerable slowdown in business spending is already upon us.
Consumer spending was noted as being better than expected for 2018, particularly in the 4th quarter of the year. This, in my view, is merely a topical salve applied by investment media to mask dramatic slowdowns recently noted in the key industrial sectors of the global economy. Consumer spending represents more of a trailing indicator in economic forecasting circles; spending generally peaks in the first quarter of any officially declared recession.
Having gone through the fiscal books of most major publicly traded corporations on the major indexes, it appears that absent the Trump tax cuts of 2018, overall US corporate profitability would be been flat to down. If this assessment is verified by a major investment house, somewhere, and then becomes public record, it will suggest that the economic slowdown actually started in the middle of 2018 and fully took hold for the end of the 2018 December fiscal quarter. Economic recessions tend to drag out for about 9 months on average, some longer, some a little shorter.
Broadly based stock market indexes tend to be THE ultimate leading indicator of economic activity on the planet. Given the absolute size of the global investment market, based upon capitalisation, it makes perfect sense that investment houses apply their collective economic prowess, to determine whether or not stocks should be higher or lower. Clearly and plainly, based upon the total declines in most major equity markets worldwide, the pricing of equities suggests that a slowdown is underway. The US Federal Reserve Board is viewing the recent inversion of the yield curve and opining that inversions may actually be the cause of recessions. Previously, it was felt that inversion was merely a symptom.
Many investors remain in the denial stage of a widely telegraphed and highly synchronized global economic slowdown. I don’t read a single analyst worth indicating any possibility of an overall DECLINE in corporate earnings for 2019; yet that’s precisely what could occur should global sales decline against a backdrop of higher wages and higher input costs. That’s Ok by me; most can continue to earn subpar returns in up markets and allow their disbelief to reduce net worth greatly in down markets. My own goal is to ascend in global wealth rankings, for that to happen, I need to earn ABSOLUTELY better returns than peers during bull markets and COMPARATIVELY better returns in down markets vs those with greater wealth, so as to close the gap. Some would argue that wholesale portfolio adjustments are required in downmarkets; I disagree and historically, my low turn ratio has borne out the merits of prudent investment selection vs cyclical trading. But, by all means, let pundits bloviate on portfolio repositioning and let institutions continue to sell a bill of goods by cherry-picking good data to hold up a bad thesis. The more disbelief that exists in markets, the better the opportunity, for me, to close that wealth gap.
At some point, investors need to choose whose advice to heed; pundit pronouncements continually riddled with error deserve to be marginalized. Misdirection and false narratives are the real problems with mainstream investment reporting, in my view. As for me, I’m well past the disbelief stage in this correction. The reduction in global capitalization of more than $10 trillion USD, once bond value declines were added into the mix, for the last quarter of 2018, is a thumping decline and is indicative of something greater than jitters; full blown selling by every institution with skin in the game was required to take markets down by that amount. For investors such as myself, the question is no longer whether the economies of the world have stopped growing; the pertinent questions are, “how much further have equities to fall” and “when will growth resume?” My own data analysis would argue that a further 15% overall decline in equities in 2019 is possible, perhaps up to a 30% decline if things get dicey. Once that is over with, and should interest rates start to decline, then equities might become something more of a bargain, and that would signal a potential turnaround in stock prices. I feel that by the 4th quarter of 2019, there could be a more attractive entry point for a new secular bull market, than exists at present.
To conclude, just so that we are crystal clear, my forecast for 2019 is that equities might wind up down by a further 15% from this point, and maybe worse, before turning for the better.