3 Ways to Protect Clients' Investments This Year

“Every man I meet wants to protect me. I can't figure out what from.” – Mae West

Stock market participants for most of the past few years have eschewed protection. It was all about making large amount of gains. Almost every advisor lost clients from “cocktail party” conversations about who had made the most money recently. We heard of retired clients that were not satisfied with only 10% to 20% gain a year. They would withdraw money from advisory account to speculate in technology stocks. And then, of course, there was the cryptocurrency craze.

Well, all of that has ended with a splat! We have entered a bear market (defined by a 20% drop from the high-level mark) according to most market indices. The technology sector declined 24% in less than two months. Energy stocks have been massive losers with losses of over 30% over the same period time. I don’t think I have to describe what has happened to bitcoin and its brethren.

What can we learn from 2018 and what do we see for 2019 (at least the first part of it)?

Slow and Steady Won the Sector Race in 2018

You couldn’t tell much about which business cycle phase we are in based on sector performance in 2018. Although some late cycle sectors such as health care and utilities had positive returns for the year (while the S&P 500 was down about 4%), typical early to mid-cycle sectors including consumer discretionary, real estate, and technology provided negative results but outperformed the broad market for the year. But both consumer discretionary and technology were more negative than the S&P 500 in the fourth quarter indicating that the economy is likely moving into a late-cycle phase where defensive and inflation-resistant sectors tend to outperform while cyclical sectors tend to underperform.

On the negative side, some sectors that historically have underperformed in the late cycle, did so, especially, financials and industrials. Other late cycle sectors, such as consumer staples, energy and materials, suffered greater than market losses. Consumer staples and materials rebounded in relations to the market in the fourth quarter indicating that we are moving to the end of this business cycle.