Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves. Currently, our Investment Climate Indicator remains at "Stormy". Stormy means that bear market rules apply, and we believe could be a period of wealth destruction.

This year, March has come in more like a lamb and less like a lion. As the chart below shows, the CBOE S&P 500 Volatility Index, an oft-quoted measure of anticipated stock market worry, returned to its pre-October area.

The past 5 months have seen a range of investor emotions. But, as has been the case for 10 years now, calm was quickly restored. We are still clearly in "Stormy" weather from an intermediate-term perspective, but as I have written here in the past, that doesn't mean we can't have some "rips" to the upside among the wealth-impeding "dips" like we saw on two occasions last year. The key point to understand right now is that while returns can be had, pursuing them involves a historically-high degree of risk.

The VIX, a market perception of fear, does not tell you that. But the VIX is not a predictive tool as much as it is a snapshot of how fearful investors are right now. So, yes, I am telling you that risk of major loss is still high. History and a wealth of indicators about the global economy are pointing in that direction.

High-frequency trading, massive amounts of assets invested similarly, and interest rates that are too low to provide a decent cushion for central banks adds up to a period where caution is king. We continue to be defensive, at the edge of the "Extreme Zone" in our portfolio positioning. Higher than normal short-term cash & equivalent investments and extreme selectivity in equity portfolios remain the priority.

The U.S. Stock Market

The U.S. stock market added a gaudy February performance to its strong January and has erased about 2/3 of its decline that started in late September of last year. And while the classic-rock singer "Meatloaf" famously sang about how two out of three ain't bad, that last 1/3 can be the toughest. It is no secret that the market has rallied, and that optimism concerning U.S.-China trade talks and an end to the latest cycle of interest rate increases by the U.S. Federal Reserve Board are given much of the credit for that move.

However, that increases the chances that the good news is out, and the potential for disappointment on those fronts is growing. After all, the drumbeat of a global slowdown, whether it becomes an actual recession or not, is growing. And as for the Fed, I am not the first commentator to raise the possibility that the end of rate hikes is primarily an acknowledgment that any further action would hasten an economic rollover. We must recognize in such a stormy investment climate that prices can reverse lower again... like a bat out of hell, so to speak.

The current environment continues to remind me of the dot-com bubble era of 2000-2001. Those who were investing back then may remember that the year 2000 came in like a lion, and by the second half of the year, the environment had completely changed. More on those parallels if and as they continue to occur. February's announcements of IPOs coming for ride companies Uber and Lyft are a garnish on that suspicion. But a run to much higher all-time highs in the near future is still a long shot as I see it. Still, we have to be ready for anything.

Bond Markets

Not much changed in February, other than a continuation of the face-plant in long-term Treasury rates. The 10-year bond, which is one of the main markers of bond market conditions in the professional investing world, has now fallen from 3.24% late last year to about 2.64% by February-end. That is good for those trying to trade bonds, as it adds some price appreciation to the interest such bonds pay. But for those investors who thought they might finally get a yield that is appreciably more than bupkis (nothing) 10 years after the global financial crisis, it has to be a mild disappointment.

The bigger issue for investors is what will happen if the economy dives into recession sooner rather than later. The Fed raised rates off of near-zero the past couple of years, but there is not nearly as much room to cut them to stimulate the economy if it sours. That is an unfamiliar Fed, especially one that has essentially propped up financial markets for a long time. This is something to watch extremely closely during the rest of 2019.

Investment Reward/Risk Trade Off

Despite the past month of moderating emotions in the investment markets, we still are looking at an environment that offers danger and big gain potential at the same time. But we track 100 ETFs in this monthly column for a reason: There is always somewhere to make positive returns, even if one has to go to some less-traditional spots to find them.

Key Market Stress Points

These are unchanged from last month, since not much has changed since then.

  • An overheating U.S. economy with inevitable wage pressure building
  • Geopolitics: China-U.S. trade talks, Brexit, slowing global growth
  • Too much leverage at the government, consumer and corporate level (yes, all 3!)
  • Federal Reserve forced to eliminate the quantitative easing policy that drove and extended the bull market
  • Investor greed and complacency at high levels

Here's the Plan

In the portfolios I manage, I continue to emphasize a combination of long-term and tactical investment strategies. Buy-and-hold investing is no longer enough. Markets have changed and investor complacency is high. After the decade-long run in the S&P 500 and a two-generation-long run in bonds, that is to be expected. But it doesn't give any investor an excuse to be caught flat-footed when the next inevitable shakeout occurs.

ETFs are much more than cheap ways to invest in the whole market, even if most investors limit their view of them to just that definition and expectation.

Crunching the ETF Numbers

The average S&P 500 stock (RSP) has outperformed the more oft-quoted capitalization-weighted S&P 500 (SPY) so far this year. Translation: a broader range of companies have participated in the massive 2-month rally.

The industrial sector (XLI)  is a pretty good proxy for how investment markets have ebbed and flowed over the past 12 months. A nearly 20% gain in just 2 months is only enough to get back to a 12-month break-even. This is another reminder of the math of investment loss -- large losses require even more of a percentage gain just to get back to where you were to begin with.

Retail stocks (XRT) continue to lag most other sectors, with a 3-year annualized return of only about 3%. The rate of change in consumer behavior is accelerating and in time we will see which retail companies thrive, which ones just survive, and which ones don't make it.


High Quality (SPHQ) and Low Volatility (SPLV) stocks have each returned "only" about 12% per year the past few years. The common thread there: lower weightings to tech stocks than some of the other ETFs shown.

Latin American stock markets (ILF) have had a superb 3-year run. Asia gets more attention from investors, and Latin markets are notorious for political instability, but where there is risk, there can be reward too.

For the first 2 months of 2019, dividend stocks of all stripes performed in line with each other. They all went up strongly. The aforementioned drop in interest rates was a tailwind.


Allocation strategies have started the year nicely...but let's be clear: The returns are coming almost entirely from their equity exposure.

Oil has been volatile. And in other news, the earth rotates around the sun, grass is green, and a clear sky is blue.

Treasuries continue to be a holding place for assets one decides should not be allocated to the risk of the stock and credit markets.

Convertible bond (CWB) returns this year are something I expect to point to as an indicator of the false sense of security in today's investment climate. These are bonds convertible into stock of the same company, and so they tend to follow the stock market up. But there is tons of credit risk here, even if the market won't pay it much attention right now.

Source for all ETF data: Ycharts.com

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Disclosure: This material contains the current opinions of the author, Rob Isbitts, but not necessarily those of Dynamic Wealth Advisors and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Rob Isbitts offers advisory services through Dynamic Wealth Advisors.

About the author: Rob Isbitts is the chief investment officer of Sungarden Fund Management, the subadviser to a long-short mutual fund (DNDHX) and the founder of Sungarden Investment Research, an investment management and equity research firm. Over the past three decades, he has managed daily liquid portfolios through diverse market conditions. He created several investment strategies, including the Sungarden Hedged Dividend portfolio, an alternative approach to the pursuit of income, preservation and long-term growth. He has authored two books: "Wall Street's Bull and How to Bear It" (2006) and "The Flexible Investing Playbook" (2010), plus over 300 articles on investing. He can be followed on Twitter @robisbitts, and my website is www.sungardeninvestment.com. He also co-host the Investing Evolution Podcast.