Tuesday, April 9, 2019

From the Desk of David Burks: "Stay the Course" to "Slow the Horse"? Investors Enjoy Powerful Market Rebound

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Senior Vice President and Equity Income Analyst David Burks has been with Hilliard Lyons, A Baird Company, since 1983. David has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four by The Wall Street Journal. David has appeared regularly on CNBC over the years.

From “Stay the Course” to “Slow the Horse”? Investors Enjoy Powerful Market Rebound

The recent conclusion of another NCAA basketball tournament reminds us of legendary UCLA coach John Wooden. Coach Wooden is best known for leading his Bruin teams to ten national championships. He is considered by many to be the best coach of all time, regardless of sport. In addition, Wooden was also an excellent teacher who offered many wise, life guiding principles. We believe that one of the coach’s sayings has particular relevance in today’s stock market environment. Coach Wooden used to say, “All of life is peaks and valleys. Don’t let the peaks get too high and the valleys too low.”

Why do we believe Coach Wooden’s advice still resonates today? It is because of the enormous market swings that investors have experienced the past seven months. Consider the following: After attaining a record closing high on September 20, the Standard & Poor’s 500 plummeted by nearly 20% before finally bottoming on Christmas Eve. Since then the market has rallied sharply, rising by 23% and pulling to within 2% of last September’s high. Given the magnitude of these moves, it’s no wonder why investors have seen their emotions swing just as sharply.

We believe it is important for investors to attempt to maintain their perspective during these unusually volatile periods such as we’ve experienced these past seven months. Late last year and in early 2019 we wrote several articles essentially encouraging investors to “stay the course.” However, now the situation has reversed. Stocks have rebounded strongly and investors are now understandably much more upbeat. Yet just as we encouraged investors to not give up on stocks last fall, we now caution against assuming this current advance will continue uninterrupted.

2019: An Excellent Year for Stocks (so far)

Were the calendar year to have ended on April 5, the stock market would have enjoyed a very good year by nearly any measure. Total return, including dividends, would have been around 16%, and well above the historical average of 10%. As evidence of the market’s year-to-date strength, the first quarter of 2019 was the single strongest quarter in nearly ten years. Moreover, the first quarter was the strongest start to a year since 1998. History tells us this good start to the year has positive implications for the balance of 2019. There have been 19 instances since 1950 where the market has been positive the first three months of the year. In 18 of those 19 years the market ended up positive and, on average, rose nearly another 10% the remaining nine months of the year. The lone exception was 1987, when the market crashed in October of that year.

Perhaps this upward trend continues yet again in 2019; perhaps it does not. We’re simply pointing out that stocks have risen very far, very fast. The same market that was trading at 13.5x estimated forward earnings in December, now trades at 17x estimated forward earnings. As a result, stocks are considerably more expensive than just several months ago.

Final Thoughts

We would encourage investors to use the recent market strength to reassess their portfolios. Have stock holdings risen to a level where they now represent a larger than planned percentage of a portfolio? If so, perhaps some rebalancing could be in order. Also, as always, know what you own. The recent upward move in the market might provide an opportunity to “prune” a portfolio of some lesser quality holdings that may have risen of late.

In sum, we’re not saying that stocks are overvalued at current levels. Nor are we saying that stocks cannot continue to climb higher in 2019; rather that investors should recognize and appreciate that stocks have enjoyed an extremely impressive 23% move higher in a very short timeframe. As a result, we believe investors may want to temper their short-term expectations, while continuing to invest in pursuit of their long-term financial goals.

While there may never be another John Wooden, there’s certainly no reason why a long term investor who sticks to the fundamentals can’t also achieve a winning record.



Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC, A Baird Company, cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.