Sitting here early Christmas morning, thinking about yesterday and this month, wanted to write you a brief note. We had a rough day on Christmas Eve; the S&P 500 is now down 20% from its 52-week high. [i] Not from the beginning of the year, but from its high point. Like riding a roller coaster, you experience the sudden drop from the high point you recently attained; it gets your attention!

I was reminded of Black Monday, October 19, 1987, although that was much worse. It had been a good year through August, but equities crashed that Monday afternoon in a frightening way. Funny to look back on it–the markets were traumatized and took some time to get over it, but the S&P 500 actually had a small gain for the full year, after all that. The long-term investors who had rebalanced from equities to bonds (back to target weights) when equities were at a high point, and then rebalanced from bonds into equities after the crash, as part of a disciplined process, did very well. Not easy, but critical for long-term success.

After the early market close yesterday, I received an email from our Chief Investment Officer, John Bussel. He reminded me that we have been through this before – in fact, this will be our 4th bear market! We have been working together since the late 90’s, and that perspective immediately helped. I felt compelled to share it with you.

The abrupt halt to the .com boom happened in March of 2000, seems like yesterday. We all remember the mortgage crisis, 2007-2009, of course (have you seen “The Big Short” lately?). John also counts 2011, when the European Sovereign debt crisis hit, even though the S&P 500 was only down 19% (technically, a bear market is down 20% or more). He has spent a lot of time in Europe, especially Spain, and it was certainly a bear market there. [1]

I am not sure how this bear market will be characterized. Unlike the ones I just described, this one appears to have no obvious cause. Markets are not wildly overpriced, we don’t have AAA debt securities defaulting and threatening the financial system, the economy, earnings and employment are all solid, with few signs of inflation. Other than the Fed tightening and potential trade issues, why the sudden revaluation? I assume more will be revealed over time.

Today is Christmas, and New Year’s is next week. I am going to enjoy the holiday season after quite the eventful year, and I am looking forward to a new year filled with all sorts of good things, and probably some challenges too! I hope you all do the same.

Best Always,

Roger Hewins

PS – before we could even send this letter we had a record day, with the Dow up well over 1,000 points, about 5%. [ii] What a difference a day makes. My goodness.

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[1] You may recall our letters at the time discussing “Contagion” as the European debt crisis unfolded, starting with Greece but soon spreading to what came to be inelegantly called the PIIGS – Portugal, Italy, Ireland, Greece and Spain.

[i] Rooney, Kate. “We Are Now In A Bear Market — Here’s What That Means”. CNBC, 2018, https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html. Accessed 25 Dec 2018.

[ii] Imbert, Fred, and Eustance Huang. “Dow Rallies 1,000 Points, Logging Its Biggest Single-Day Point Gain Ever”. CNBC, 2018, https://www.cnbc.com/2018/12/26/us-futures-following-christmas-eve-plunge.html. Accessed 27 Dec 2018.