Canal Capital is Pleased to announce that it was named to the RIA Future 50 list published by CityWire USA. The RIA Future 50 firms represent a group of finance professionals who are collectively creating this new investment landscape. They have their own unique story to tell, are driven to succeed on their own terms and, most importantly, are in charge of their own investment decisions.
On August 14th, the 10 year Treasury Yield went slightly below the yield for the 2 year Treasury, the first time this has happened since 2007. Economist pay close attention to the 10 year vs. 2 year Treasury yields, as its historically been a strong predictor that a downturn is on the way. The yield curve has inverted before every US recession since 1955, although it sometimes happens months or years before the recession starts. The average time between the last 5 yield curve inversions and a recession was 17 months. This lead time is the key and its still very uncertain how long a lead time we may have in the current economy before there is an actual recession. That said, an inverted yield curve, like most other indicators, is not perfect and doesn’t mean a recession is imminent.
As we write this letter and reflect back on the past few weeks, the word that keeps coming to mind is REDEMPTION. Just like the Virginia Cavaliers basketball team in the National Championship and Tiger Woods at The Masters, the market has had the ultimate bounce back story: falling 20% the last few months of 2018 to up over 16% for the year as of the writing of this letter. Despite this bounce back, the risks initially associated with the steep decline in 2018 are still very much there, and until we have a clear signal telling us otherwise, we will remain with a more defensive posture. After all, it was the defense by Virginia and the safe play of Tiger Woods that won them championships.
What a difference a year makes! The largest drop in 2017 was less than 3%, while 2018 experienced the largest drop since 2009 at nearly 20%. In 2017, December saw near record highs while December of 2018 was the worst on record (except 1931, The Great Depression); Christmas Eve was the worst in history. Stocks were not the only problem investment: nearly every major asset class was negative for the year with the exception of the aggregate bond index which was up 0.01%. The chart below shows that among the eight largest asset classes, none gained more than 5% for the first time since 1972 (see chart below). 2018 was a major anomaly and will go down in history as a tough year for investors.
Despite what some people may say, no one really knows the exact reason as to why the market has pulled back so ferociously, but what we do know is that in any given year, the market normally has 3 drops of over 5%. This is the 2nd drop this year after zero in 2017. In other words the market generally goes up over time, but can take a step back or two at any moment. That said, markets tend to move in cycles and we must be cognizant of where we are because, as cycles get longer, pullbacks tend to become more frequent and more severe.