GSR Capital Management 1Q 2019 Newsletter

So much for the proverbial Santa Claus rally.  Historically, the 4th quarter of the calendar year is a positive period for stock market performance, and in particular the month of December.  2018 would have nothing to do with it.  Instead, many of the major U.S. stock indexes posted their worst quarterly performance since 2008.  Even more oddly, stocks traded at their lowest prices for the year on the two days each side of Christmas.  That has got to be a first.

How bad was it?  The S&P 500 was down 13.5% in the 4th quarter.  The Russell 2000 index of small companies fared even worse, down 20.2%.  Stocks overseas were challenged too, with the MSCI EAFE index of established foreign economy stocks down 12.5%.  The MSCI Emerging Market index fared much better, down a more palatable 7.5%.  For the year these four indexes were down 4.4%, 11.0%, 13.8% and 14.6% respectively.  Bonds as measured by the Bloomberg Barclays U.S. Intermediate Government/Credit index were up .9%.

Diversification was of little solace to investors the first 9 months of 2018 as bonds and real estate suffered in the face of rising interest rates and foreign markets were hurt by a strengthening U.S. dollar.  In the 4th quarter and December in particular, diversification again showed its merits as these other asset classes helped buffer the drop in domestic stocks.  I believe the relative outperformance of foreign stocks versus domestic in the month of December was noteworthy in that the U.S. dollar strength appears to have run its course.  Similar to what we saw in 2017, I believe we are likely to see foreign investments again benefit from currency changes in 2019.

In addition to the usual culprits du jour of stock market volatility (concerns about the trade war with China, slowing global growth, Federal Reserve interest rate policy, and unending news coming out of Washington), I read that approximately 150 hedge funds were closing and thus liquidating their positions at the end of 2018.  Hedge funds are unregulated investment partnerships that are only available to high net worth and institutional investors.  Investors in hedge funds have limited windows during which they can redeem their shares, between mid November and the end of December.  Many hedge funds have struggled in recent years.  I believe these forced liquidations have led to artificially - and temporarily - suppressed stock prices.  I periodically will hear someone claim that the big investors control the stock market and have an unfair advantage.  I disagree.  For those of us that don’t have to sell when the markets are down, this can create investment opportunities (whether it be through the investment of new cash, timely rebalancing, or shifting focus to positions that appear to offer the most attractive value).  This recent sell-off combined with estimated earnings growth in 2018 of 19% has led to the most attractive valuations we have seen in stocks in 5 years.

So far in 2019, it appears we are seeing progress in trade negotiations between the U.S. and China.  A resolution to this conflict could go a long way towards improving sentiment.  Also, comments earlier this month by the Federal Reserve chairman indicated the Fed may exercise more restraint going forward in raising interest rates.  This is very encouraging news as I believe the Fed was running the risk of killing the goose that is laying the golden eggs – that is, the economy.  Stocks have responded and are up nicely through the first 3 weeks of the new year.

The financial press periodically ponders the question of when we will see the next bear market.  In many ways, we just had it.  Recall that a bear market is defined by a drop in stocks of 20% or more off of their highs.  Typically closing prices are used for each day as opposed to using the high and low trading range on any given day.  By this measure the Russell 2000 and the technology-laden NASDAQ hit bear markets as these closed down 27.2% and 23.6% respectively at their low points last month.  The S&P 500 came very close to the 20% mark, down 19.8%.  I’m going to call that close enough, especially considering it broke the 20% level when you consider intra-day trading levels.  Does all this mean the bull market in stocks is over?  The short answer is not necessarily.  History shows that we have experienced bear market drops in the midst of longer term (secular) bull markets.  I believe this to be another one of those occasions.

 I wish you and your family a healthy and prosperous new year.



Glenn S. Rank, CIMA®

Certified Investment Management Analyst®



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·         The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  The Russell 2000 Index covers 2000 of the smallest companies in the Russell 3000 index, which ranks the 3000 largest U.S. companies by market capitalization. The NASDAQ covers 4500 stocks traded over the counter and represents many small Composite index company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively.  International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors.  Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in smaller companies can be riskier than investing in larger companies. Inclusion of these indexes is for illustrative purposes only.  Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance.  Individual investor’s results will vary.

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