Merry Christmas to you and yours!
This Christmas season, we hope you are focusing on spending time with loved ones and celebrating Christ’s birth. At Archetype, our job is to worry about the markets so that you don’t have to! However, in case you have been distracted by recent market volatility, we’ve organized this mid-month update to keep you informed of our latest thinking.
As you may know, we publish a monthly “Market Commentary” in our Blog. You will find our “November 2018 Market Commentary” there; as well as, a blog from earlier this week entitled, “Money Talks: Markets Got You Dizzy?”.
In that latest piece, we discuss the psychological side of investing. If you have lived through a few market cycles, you’ve seen how short-term markets can be driven by human emotion. There is a reason that the Volatility Index is commonly referred to as the “fear index”—panic usually causes a retreat. But for every seller, there must be a buyer. Which means that someone out there is betting that the price is going higher.
One of the key points in the blog is from a Nobel Prize winning study which determined that people experience two times the emotional impact of losing something than they do the impact of gaining something.
Therefore, when the market goes down, the average investor feels an emotion two times stronger than he experiences when he gains the same amount.
If you’ve ever done a trust fall, you know that sensation before you decide fall into the waiting arms of your peers. You can see them there, and you know they’re going to catch you. But the potential terror of not being caught still clouds the logic right in front of your eyes. You still have to force yourself to take the plunge.
Navigating a volatile market often feels the same. It’s difficult to sift through nonstop commentary and the emotional impact. But long-term markets aren’t driven by emotion. They are driven by human progress… the spirit inside all of us that wants to improve our lives, our communities, and our world. And that long-term outlook combined with experience and principles is what guides great investors through volatile markets.
At Archetype, our investment philosophy is called “The Three Dials”. Our Senior Analyst, Ethan Pollard, has written a series of “Deep Dive” articles on our website about our approach. The primary benefit of our philosophy is that it takes the emotion out of the investment process. It is our primary tool in our quest to maximize returns and minimize losses. Here’s the mid-December update on each of The Three Dials:
- Economic Fundamentals: Positive (unchanged from last month)
The Atlanta Fed GDPNow model estimates Q4 GDP growth in the US of +2.9%, up from the estimate of +2.6% at the end of November. There are no signs that the US or global economy is in imminent danger. Our Economic Dial remains in a “Positive” position.
- Market Sentiment and Momentum: Negative (decreased from “Neutral” last month)
Market participants have been spooked by the Fed’s persistence in raising interest rates, causing stocks to break recent support levels. For now, stocks are in a clear downtrend, which has turned our Momentum Dial to “Negative” for the time being.
- Valuation: Negative (unchanged from last month)
Stock declines have brought valuation to a more moderate level, though still expensive by historical standards. Perhaps this reduced valuation will attract new buyers, but for now our Valuation Dial remains in a “Negative” position.
On a composite basis, The Three Dials are currently showing a “Moderately Bearish” reading as it pertains to the overall risk of the market.
Our advice is to enjoy the Christmas season and rest-assured that we are keeping a close eye on the markets and our indicators. Your Archetype team will keep you posted on our recommended changes.
Thanks again for your trust as we enter 2019!
Your Archetype Team
Federal Reserve Bank of Atlanta (2018, December 21). Atlanta Fed GDPNow Estimate for 2018: Q4. Retrieved from https://www.frbatlanta.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdfKollmeyer, B. and Matthews, C. (2018, December 19). Stocks Tumble after Fed Raises Rates Again, Lowers Expectations for Hikes Next Year. Retrieved from https://www.marketwatch.com/story/us-stock-futures-climb-ahead-of-fed-meeting-trade-optimism-returns-2018-12-19
Disclaimer: Our intent in providing this material is purely for informational purposes, as of the date hereof, and may be subject to change without notice. This article does not intend to constitute accounting, legal, tax, or other professional advice. Visitors and readers should not act upon the content or information found here without first seeking appropriate advice from a trusted accountant, financial planner, lawyer or other professional.
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