2018 Sees Market Volatility Return with a Vengeance

The first quarter of 2018 brought an abrupt end to the incredible period quietly enjoyed by equity and bond markets for much of the past two years. In January equity markets took off, resulting in monthly gains of almost 6%. January gains followed strong performance in 2017, where markets were up more than 20% for the year.

Oh, how things have since changed…

Beginning the first week in February, stocks plummeted approximately 10% in less than two weeks, during which time we saw days with the largest declines since 2008. Bonds did not fare much better, as we saw the ten-year treasury yield jump from 2.46% all the way to 2.90%. The cause for this was the realization that actual demand-side growth worldwide may be back, after a decade in hibernation. If true, this gives support to central bankers’ attempts to raise rates – in addition to selling bonds that were purchased to pressure yields down in hopes of stimulating the economy. The thinking is that rising rates will stifle fledgling growth and halt the justification for increasing stock prices. As only the market can do, it took what would otherwise be very good news and interpreted it as a harbinger of change in the perceived value of assets. As a result, investors across the world sold everything and moved to the sidelines. We wrote about this at length in February in our blog post and letter to investors. I encourage everyone to read it, if you have not already. It can be found at www.cabanaportfolio.com/blog.

No sooner had equity markets hit correction territory of down 10%, interest rates stabilized and buyers of stocks (and even bonds) stepped back in and we saw markets recover more than 5% of the losses in ten trading days. Markets then turned around and promptly gave back 3% of those gains, followed by another positive bounce of 4%, all over the course of the next ten days. Worn out yet? Don’t be, because next stocks dropped 7.2% over nine days between March 12 and March 23. As I am writing this, the Dow Jones is up 2.8% – for the day! This, ladies and gentlemen, is volatility on a grand scale.

Now that we have identified exactly what we are dealing with, what do we do about it? The first thing we do is we stop and take a deep breath and realize that at Cabana we are long term investors, not day traders. As investors, we are on a journey. During our journey, we will have sunshine and rain. Some roads will be smooth as glass and others under construction. Some towns will be well kept and beautiful while others will be lackluster and poor. Throughout all of this, we will take comfort in the fact that we have a map, which shows that our destination lies ahead, that we have a reliable car to protect us from the elements and that we have plenty of time to get where we are going. We have a plan. We will travel light and quick, with windows down on bright sunny days. We will travel slow when the skies darken and even stop if we cannot see clearly. We will take it as it comes and keep moving forward as conditions allow. Most importantly, we will enjoy the journey and attempt to control only those things that we can.

While this simple analogy may seem silly, I believe it is the very perspective that we, as investors, must have to be successful. At Cabana we build portfolios for investors of all kinds. The common thread in what we do is that all Cabana portfolios attempt to provide a reliable vehicle for the investing journey. This car represents the suitability part of choosing a portfolio, which will vary based on each investor’s specific profile. Some people prefer big soft Cadillacs. Others prefer race cars, and some like pickup trucks. Each has advantages and disadvantages throughout the journey. The race car will be great fun on a warm sunny day driving down a smooth highway but won’t be much fun in stop-and-go traffic. The pickup truck is slow and drinks a lot of gas, but will traverse the broken asphalt and pot holes sure to be encountered with ease. The Cadillac is not great or bad at anything, but it sure is comfortable.

We build our portfolios to take what our investing journey gives us. When things are good, we roll the windows down and speed up. When things get bumpy or it starts to rain, we roll the windows up and slow down. If things get worse, and it’s raining so hard we cannot see, we might even stop and turn on our hazards. What we do not do is get out of our reliable vehicle. We know that the rain will pass, and the light will come, and we will eventually be able to travel on. We will not take the chance of leaving our car and becoming lost on our journey. We stay invested.

Finally, our Cabana Portfolios are designed to let us all take comfort in the fact that there is a plan. We invest at times and in assets throughout the various market cycles which conform to our algorithm’s methodology. We may not get to our destination as quickly as some, but we believe that we will not break down along the way either. At Cabana we enjoy the ride!

-G. Chadd Mason, CEO





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