2018 Q4 Review

Overview

As woeful as December was, January was just as ebullient. 

Slowing growth and a persistent Fed gave way to hope on trade and Mr. Powell demonstrating a kinder, gentler Fed.  And yes, a lot of ingredients go into the recipe of markets each day, but the Fed has a lot of say in how things play out.  In a domestic economy driven by consumption, and most of that consumption obtained through various forms of debt/credit, the cost of money matters, and the Fed still has a big say in it.  Most people today have more credit card debt than they have access to liquid funds.  Still there are several issues that will need to be managed or resolved if markets are to remain on an upward trajectory.  Slowing growth is front and center and how it will impact earnings and valuations. China, politics, and world growth all play into the outcomes of the new year, but it’s the same script we’ve had for several quarters.

Predicting how markets react to these is impossible.  The market does not seem to be significantly overvalued.  On a monthly basis the December PE of the S&P 500 (19.69) is cheaper than any month since 2014, but this is noteworthy only if earnings quality hasn’t eroded because of changes to the tax law and other factors like share buybacks.  GAAP earnings aren’t in line with NOPAT, and when the cost of capital is accounted for (economic earnings), they are down.

We’re near the midpoint of the SPX highs from September of 2018 and the lows of December.  Range bound is how it feels and don’t be surprised if it stays this way.

4th Quarter 2018

Fourth quarter results that ended in December showed how exposed SCI portfolios were to the broad market.  Domestic equities were most vulnerable during December.  Foreign exposure held up well during the selloff.  Keep in mind officially our fourth quarter ended in January of 2019 and as a result our true fourth quarter numbers much better as January results erased most of the damage done in December. For the quarter the conservative model closed up .0053% before fees, moderate conservative was up .0083%, the moderate portfolio was down .0019%, moderate growth was up .0072%, and the aggressive growth was positive by .0097%, and again all these are reported before fees.  Fees reduce these returns.  For the previous 12 months only October (final month of our 3rd quarter) showed worse results than December.

1st Quarter 2019 Re-balance

With the re-balance a week old the models experienced the most turnover since inception. Only two funds this quarter have a short-term redemption fee, and both are 30 day with a small penalty if sold within the 30-day period. At least 13 of the funds are new as the results of SIA’s (Sortino Investment Analytics) analysis dictated the changes.  This will have no impact on any portfolio currently in the models. As I mentioned earlier January allowed us to make up some of the losses in December and the new portfolios are off to good start for the 1st quarter.

Of note for the new quarter is that expense ratios are down across each portfolio, but yields are as well.  Expense ratios are 42 bps for the conservative model, 56 bps for moderate conservative, 67 bps for moderate, 72 for moderate growth, and 77pbs for the aggressive growth model.  Yields are lower in all models ranging from a yield of 2.09% in the conservative model to .71% in the aggressive growth portfolio. Manager ownership is high among equity funds as bond fund managers typically don’t have exposure to the funds they manage.  Managers for the new quarter are overweight financials, technology, and industrials.  Two of which are highly sensitive to interest rates.

Expect continued volatility during 2019.  Many issues will need to be resolved and if not, uncertainty will continue.

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