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4Q18 Quarterly Letter


4Q   2018 INVESTMENT LETTER         

“We can easily forgive a child who is afraid of the dark; the   real tragedy of life is when men are afraid of the light.”

-Plato

OUR OUTLOOK

First let’s review 2018. For most investors 2018 was not great.

Emotionally the 4th quarter decline was both swift and severe. Based on Russell indexes, large cap stocks were down 13.8% and small caps were down 20.2%.

The 4th quarter decline had a major impact on full year 2018 equity returns.

The decline in the 4th quarter was one of the worst in history.

The month of December was the second worst since 1926, declining 9.03%. The worst December was in 1931.

October historically has been the “cruelest “month.  Five of the worst October’s occurred prior to 1936. Still October of 2018 comes in 8th among all time worst October’s.   

Not surprisingly the S&P 500 was down 13.5% in the 4th quarter. 

While 2018 seemed to be “cruising” along as we entered October, double digit returns evaporated. Full year returns became negative.  Investors were alarmed and frightened.

The BIGGEST challenge investors face following a severe financial crisis is lack of confidence.  As a result history tells us people, when investing, are far too cautious for too long. While 2007-2008 is more than 10 years past, it remains “fresh” in our minds.

When I was growing up in the 1950’s, I must confess I was amused by my grandparents and parent’s habits and opinions regarding money.  They had been deeply impacted by the Great Depression. I know because they never tired of telling the same stories over and over about the hardships they had endured.

I suspect today parents and grandparents are behaving about the same in regard to the Great Recession resulting from the financial crisis of 2007-2008. For those under 20 you know exactly what I am talking about.  Keep in mind those “scars” are not ever going to be healed completely. And when they dull with time get ready for another financial crisis. Because when fear is replaced by over-confidence, bad things eventually occur in the economy and the markets.

Looking back no one should have been surprised by volatility in the 4th quarter.  It should have been expected and anticipated.  We had almost 10 years of uninterrupted advances with five corrections.

As I write this letter it is too early to know if the correction has passed. Technically the S&P 500 never became a bear market.  While it did trade on a single day more than 20% below its previous high, the S&P 500 never closed more than 20% lower.  While mid cap and small cap indexes closed more than 20% below previous highs, they do not represent the broad market, so officially there was not a bear market in 2018 because the S&P 500 never closed more than 20% lower.

We continue to believe this bull market has far to go before it finally gives way to a cyclical bear market like the one we experienced from 1999 to 2009. Remember a cyclical bull market does not mean that during its time there are no bear markets.  It requires each decline to be followed by higher highs. A cyclical bear market means lows are followed by lower lows.  It was the case from 1999-2009. We now refer to it as the Lost Decade.

Each time we recover from fright triggered by a sell off like the 4th quarter, people will gain confidence.  As frights multiply along with their recoveries, over confidence will dominate.  Eventually national confidence in the economy and markets will return and “everyone” will join the party.  Unfortunately a national “funk” following the “Great Recession” remains part of the national mood.

Our view is we have not come close to levels of overconfidence like we witnessed prior to the financial crisis. Remember “irrational exuberance”. Now the national mood is closer to irrational nervousness.

At Curran, we believe this bull has far to run before the party ends. Many seem to believe buying now is much too late to join in the merry making. Perhaps, but maybe buying now is the same as being fashionably late. History will tell us. 

Our view of history is we should be buying.  When the conventional wisdom is to “buy the dips”, then it will be time to take a “sober look”.  For now irrational nervousness is creating opportunities. It is always easier to see problems than it is to see beyond the clouds.

Sincerely,



Thomas J. Curran           Kevin T. Curran, CFA
CEO & Founder              President & CIO

The material contained in this article is for educational and informational purposes only.  The informationherein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. It is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  CIM, LLC does not provide tax or legal advice.  No one connected with CIM, LLC can ensure tax consequences of any transaction.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.