By Rob Isbitts

Author's note: 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.

We continue to sit on the edge of the defensive "Extreme Zone" of our portfolio positioning. Higher than normal short-term cash and cash equivalent investments, and extreme selectivity in equity portfolios are "in" for us now.

Conditions have changed, and that means the most important thing an investor can do is to acknowledge that and not place all of their faith in black-or-white scenarios from here forward. As always, an approach that seeks to balance the probability of positive returns with those of additional major declines, and invest in accordance with that balance, is the best course. But remember, it's a moving target, and these days it moves very quickly.

The good news? None of the above means that we abandon investing altogether. Sure, cash, short-term instruments and hedges play a bigger role than in less precarious times. But the stock market has many different segments, and opportunities appear all the time.

Stock Market

Well, it finally happened. The U.S. stock market stopped teetering and caved in. As we have noted before in this space, our proprietary Investment Climate Indicator turned to its most bearish of four levels ("Stormy") back at the end of January...The U.S. stock bull market (as depicted by the S&P 500, Dow and Nasdaq) is in its very, very late stages.

So, is that it? Now that the S&P 500 has touched the vaunted 20%-decline level that officially makes this a stock bear market, is it time to bring back those Dow 30,000 hats in anticipation of new highs in 2019? Not so fast.

This is still a wounded bull, and the sharper the rallies, the more it reminds us of classic bear market behavior. I see increasing similarities to the late year-2000 period, as the market turned from bull to bear in the year 2000 -- at the time of the dot-com bubble. That sparked two years of major declines in momentum stocks, while higher-quality, non-tech blue chip stocks fared pretty well. Fierce, quick rallies of 10% or so are quite possible, as that is a staple of bear market cycles. But a run to much higher all-time highs is far less likely. Be ready for anything.

Investors must moderate their return expectations from the stock indexes, or they will be very disappointed. It doesn't matter what you call it. Correction, bear market, pause in the joy, or anything else.

Bond Market

The big picture here is that U.S. bonds are likely into their third year of a bear market, following a nearly four-decade-long bull market. But it is my observation that many retail investors have no idea that this is happening, as evidenced by a continued flood of assets into bond funds. As a result, balanced portfolio returns are in their third year of lackluster returns

The split personality of the bond market continues. Treasuries were fairly competitive investments in late 2018, but the more I look at the credit bond market (corporates, high yield) the more I see early signs of a debt crisis. When you consider the deluge of BBB-rated bonds that has flooded the market since the Financial Crisis a decade ago, you have to figure it will eventually catch up with investors in bond funds, and those who reached for yield via ownership of individual bonds.

As for short-term rates, most investors know they have increased. They see it in their CD and T-bill rates. What is under-appreciated by the market may be the gradual impact that higher borrowing costs will have on the economy in the years ahead. However, those higher short-term rates have resulted in a nice additional tool for income-oriented investors during a period in which the stock market has tipped over.

Investment Reward/Risk Trade Off

Reward potential still exists (as it always does), but at a higher risk level than at any point in the past 10 years. However, risk-management should be a very high priority versus pursuit of reward.

Points of Interest

The same issues that led to the fourth-quarter 2018 rollover in the stock market:

  • An overheating economy
  • Geopolitical risk
  • Trade spats
  • Excessive leverage
  • Reversal of nine years of easy money policies by the Federal Reserve
  • Historically high levels of investor speculation and consumer debt
  • Investor complacency, even after a warning shot fired by the global equity market

The old reliable signal of coming recessions is the spread in rates between 2-year and 10-year U.S. Treasury securities. As of year-end 2018, that spread was down to just 0.21% (21 basis points). But we don't need a recession to be formally declared to freak out the markets. All it takes is a sufficient level of fear that one is coming. As they say, the markets are forward-looking. But they will not look forward to that, so to speak.

The Plan

We diversify among owning long-term investments and renting tactical investments. This combination should produce more balanced results in the coming years, as opposed to traditional stock/bond mixes, or allocations to different asset classes. Hedging techniques are particularly valuable tools to have in one's arsenal at this stage of the market cycle. Finally, do not assume that what has worked for the better part of the past 10 years will continue to work.

The "Santa Claus Rally" came to town just in time to save the S&P 500 from a deeper decline than 20% during the fourth quarter of 2018. Frenetic late-December trading is odd to begin with, and there is a sense from many Wall Street pros that the volatility will continue into 2019.

Global Market Performance Summary

EQUAL-WEIGHTED TOTALS FOR THE SUNGARDEN ETF 100

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

-9.83%

-7.52%

-7.35%

5.67%

2.67%

While this group of 100 ETFs is certainly a wide-ranging group, when you average their returns you get a sense of general global market conditions for investors over the time periods shown. That this wide-ranging group of ETFs was off nearly 8% in 2018 tells you that there were few places to hide.

U.S. Equity - Broad Market

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

ACWI

iShares MSCI ACWI ETF

-12.81%

-9.18%

-9.18%

6.98%

2.18%

DIA

SPDR Dow Jones Industrial Average ETF

-11.29%

-3.74%

-3.74%

12.79%

2.28%

EEM

iShares MSCI Emerging Markets ETF

-7.64%

-15.31%

-15.31%

8.83%

2.27%

EFA

iShares MSCI EAFE ETF

-12.62%

-13.81%

-13.81%

3.01%

3.39%

IWC

iShares Micro-Cap ETF

-22.26%

-13.12%

-13.12%

5.74%

1.01%

IWM

iShares Russell 2000 ETF

-20.29%

-11.11%

-11.11%

7.39%

1.42%

MDY

SPDR S&P MidCap 400 ETF

-17.28%

-11.28%

-11.28%

7.40%

1.39%

QQQ

Invesco QQQ Trust

-16.73%

-0.12%

-0.12%

12.38%

0.93%

RSP

Invesco S&P 500 Equal Weight ETF

-13.90%

-7.82%

-7.82%

7.75%

2.02%

SPY

SPDR S&P 500 ETF

-13.52%

-4.56%

-4.56%

9.17%

2.08%

SPYG

SPDR Portfolio S&P 500 Growth ETF

-14.63%

-0.10%

-0.10%

10.74%

1.54%

SPYV

SPDR Portfolio S&P 500 Value ETF

-11.98%

-8.98%

-8.98%

7.13%

2.97%

VEU

Vanguard FTSE All-Wld ex-US ETF

-11.55%

-14.19%

-14.19%

4.67%

3.29%

After the past few months' activity, there is so much to talk about here. So I will focus only on the optical illusions. The Nasdaq 100 closed the year at nearly break even, but that is only because it was off-the-charts strong for the first three quarters of the year. It dropped over 17% during the last three months. And, emerging markets outperformed their developed-market friends during the vicious fourth-quarter selloff, but this may be just a catch-up effect by the rest of the world, and not some indicator of an emerging market spring, so to speak.

U.S. Equity - S&P Sector

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

XLB

Materials Select Sector SPDR ETF

-12.22%

-14.87%

-14.87%

7.23%

2.20%

XLC

Communication Services Sel Sect SPDR ETF

-15.47%

-16.87%

n/a

n/a

0.00%

XLE

Energy Select Sector SPDR ETF

-23.57%

-18.21%

-18.21%

1.24%

3.58%

XLF

Financial Select Sector SPDR ETF

-13.08%

-13.04%

-13.04%

9.15%

2.12%

XLI

Industrial Select Sector SPDR ETF

-17.33%

-13.24%

-13.24%

8.88%

2.15%

XLK

Technology Select Sector SPDR ETF

-17.35%

-1.66%

-1.66%

14.94%

1.60%

XLP

Consumer Staples Select Sector SPDR ETF

-4.97%

-8.07%

-8.07%

2.93%

3.05%

XLRE

Real Estate Select Sector SPDR

-3.81%

-2.37%

-2.37%

3.54%

3.78%

XLU

Utilities Select Sector SPDR ETF

1.37%

3.92%

3.92%

10.55%

3.33%

XLV

Health Care Select Sector SPDR ETF

-8.66%

6.28%

6.28%

7.96%

1.57%

XLY

Consumer Discrete Sel Sect SPDR ETF

-15.20%

1.59%

1.59%

9.76%

1.34%

When consumer staples, REITs and utilities lead the performance charts, that tells me two things: Investors are thinking defense, and if those three break down, it's a telltale sign that the broad market will take another big leg lower. Again, very, year-2000-like to me. "Relative return" among sectors is likely to be a big deal to investment pros in the coming months.

U.S. Equity - Industry

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

BBH

VanEck Vectors Biotech ETF

-18.20%

-10.69%

-10.69%

-4.03%

0.50%

FDN

First Trust Dow Jones Internet ETF

-17.58%

6.17%

6.17%

16.07%

0.00%

GDX

VanEck Vectors Gold Miners ETF

14.53%

-8.73%

-8.73%

16.05%

0.56%

HACK

ETFMG Prime Cyber Security ETF

-15.86%

6.72%

6.72%

9.70%

0.18%

ITB

iShares US Home Construction ETF

-14.84%

-30.92%

-30.92%

3.95%

0.63%

IYR

iShares US Real Estate ETF

-5.77%

-4.30%

-4.30%

3.85%

3.53%

IYZ

iShares US Telecommunications ETF

-11.40%

-8.58%

-8.58%

-0.35%

3.17%

KBE

SPDR S&P Bank ETF

-19.21%

-19.63%

-19.63%

5.11%

2.18%

KRE

SPDR S&P Regional Banking ETF

-20.70%

-19.00%

-19.00%

5.53%

2.25%

MLPA

Global X MLP ETF

-18.01%

-15.67%

-15.67%

-2.29%

10.00%

MLPX

Global X MLP & Energy Infrastructure ETF

-17.13%

-15.62%

-15.62%

3.13%

5.95%

MOO

VanEck Vectors Agribusiness ETF

-12.00%

-6.15%

-6.15%

8.82%

1.55%

REM

iShares Mortgage Real Estate Capped ETF

-6.00%

-2.99%

-2.99%

11.93%

9.86%

RTH

VanEck Vectors Retail ETF

-15.05%

3.63%

3.63%

7.99%

0.80%

SOCL

Global X Social Media ETF

-13.64%

-16.39%

-16.39%

12.12%

0.00%

TAN

Invesco Solar ETF

-10.56%

-26.18%

-26.18%

-13.51%

0.00%

XBI

SPDR S&P Biotech ETF

-25.15%

-15.27%

-15.27%

0.99%

0.28%

XHB

SPDR S&P Homebuilders ETF

-15.03%

-25.72%

-25.72%

-0.80%

1.25%

XME

SPDR S&P Metals and Mining ETF

-23.06%

-26.76%

-26.76%

22.28%

2.23%

XOP

SPDR S&P Oil & Gas Explor & Prodtn ETF

-38.56%

-28.09%

-28.09%

-3.44%

1.02%

XRT

SPDR S&P Retail ETF

-19.31%

-8.03%

-8.03%

-0.33%

1.51%

We track 21 industry ETFs, and they all ended in the red for the fourth quarter. Internet stocks and retail actually finished up for the full year 2018, but based on their late-year declines, that appears to be a past trend. Another development: Only eight of the 21 industry ETF have 3-year annualized returns of greater than 5%. And most of those are concentrated in FAANG stocks or mining-related companies. That does not sound like a bull market, but rather one that has been gradually transitioning to bear-mode for a while, without many noticing.

U.S. Equity - Thematic

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

DVP

Deep Value ETF

-13.79%

-5.99%

-5.99%

14.25%

2.78%

MOAT

VanEck Vectors Morningstar Wide Moat ETF

-10.46%

-1.39%

-1.39%

13.97%

1.66%

SPHB

Invesco S&P 500 High Beta ETF

-21.08%

-15.54%

-15.54%

7.91%

1.96%

SPHQ

Invesco S&P 500 Quality ETF

-14.74%

-7.08%

-7.08%

8.15%

1.86%

SPLV

Invesco S&P 500 Low Volatility ETF

-5.26%

-0.18%

-0.18%

8.84%

2.18%

SPXT

ProShares S&P 500 ex-Technology

-13.30%

-7.09%

-7.09%

6.47%

2.03%

High-risk investing ended 2018 with a thud, as shown by the return of high-beta stocks. Low-volatility stocks fared better for the final quarter and for the year. In fact, they have now passed their high-beta pals on a 3-year basis. But don't get fooled by this backward-looking analysis. There are few if any safe-haven market segments yet. And a likely theme of early 2019 will be a back-and-forth between the two segments, as the fast-money crowd tries to root out where the relative returns are.

Non-U.S. Equity

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

AAXJ

iShares MSCI All Country Asia ex Jpn ETF

-8.72%

-15.04%

-15.04%

8.04%

2.10%

EPP

iShares MSCI Pacific ex Japan ETF

-7.84%

-10.77%

-10.77%

6.46%

5.00%

EWJ

iShares MSCI Japan ETF

-15.19%

-14.09%

-14.09%

3.14%

1.71%

FXI

iShares China Large-Cap ETF

-7.72%

-13.26%

-13.26%

6.10%

2.74%

ILF

iShares Latin America 40 ETF

-0.35%

-6.87%

-6.87%

15.91%

3.12%

INDA

iShares MSCI India ETF

3.51%

-6.69%

-6.69%

7.69%

0.94%

VGK

Vanguard FTSE Europe ETF

-12.95%

-14.91%

-14.91%

2.49%

3.95%

VPL

Vanguard FTSE Pacific ETF

-13.31%

-14.40%

-14.40%

5.14%

3.06%

International markets did not offer much relief from the U.S. drop, but for India and Latin America, which tend to be fringe spots for most U.S. investors.

Equity: Dividend Focused

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

DEM

WisdomTree Emerging Markets High Div ETF

-7.53%

-7.69%

-7.69%

12.59%

4.47%

DIV

Global X SuperDividend™ US ETF

-9.26%

-6.61%

-6.61%

4.32%

7.08%

DVY

iShares Select Dividend ETF

-9.74%

-6.32%

-6.32%

9.38%

3.58%

FDL

First Trust Morningstar Div Leaders ETF

-7.46%

-5.96%

-5.96%

8.34%

3.97%

HDV

iShares Core High Dividend ETF

-6.03%

-2.98%

-2.98%

8.43%

3.67%

IDV

iShares International Select Div ETF

-10.59%

-10.34%

-10.34%

5.05%

5.93%

SDIV

Global X SuperDividend ETF

-14.45%

-15.75%

-15.75%

2.23%

9.15%

SDOG

ALPS Sector Dividend Dogs ETF

-13.85%

-11.40%

-11.40%

6.93%

4.03%

SDY

SPDR S&P Dividend ETF

-7.89%

-2.74%

-2.74%

10.64%

2.73%

SPHD

Invesco S&P 500 High Div Low Vol ETF

-6.75%

-6.15%

-6.15%

8.72%

4.40%

SPYD

SPDR Portfolio S&P 500 High Div ETF

-7.99%

-4.88%

-4.88%

10.11%

4.75%

VIG

Vanguard Dividend Appreciation ETF

-11.00%

-2.08%

-2.08%

10.25%

2.11%

VYM

Vanguard High Dividend Yield ETF

-9.55%

-5.91%

-5.91%

8.63%

3.44%

2018 continued a disturbing performance-drag for stocks with above-average dividend yields. Higher interest rates are a popular culprit for this in the media, but long-term rates actually reversed course and fell during the final quarter of the year. I suspect that high-yield stocks are simply being treated similarly to the rest of the market -- that is, with itchy trigger-fingers by bearish investors.

Asset Allocation

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

AOA

iShares Core Aggressive Allocation ETF

-10.21%

-7.87%

-7.87%

6.03%

2.37%

AOK

iShares Core Conservative Allocation ETF

-3.74%

-3.52%

-3.52%

3.59%

2.40%

AOM

iShares Core Moderate Allocation ETF

-4.67%

-3.89%

-3.89%

4.28%

2.53%

AOR

iShares Core Growth Allocation ETF

-7.39%

-5.83%

-5.83%

5.17%

2.49%

The U.S. stock market's December decline finally reminded investors that diversification is not as simple as adding some bonds to one's portfolio. While U.S. Treasuries helped stem some near-term losses in balanced portfolios, it will take more than simple stock-bond allocation to preserve capital in a continued downtrend in stocks.

Commodity/Currency

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

GLD

SPDR® Gold Shares

7.53%

-1.94%

-1.94%

6.12%

0.00%

PDBC

Invesco Optm Yd Dvrs Cdty Stra No K1 ETF

-18.90%

-12.77%

-12.77%

2.63%

1.00%

UNG

United States Natural Gas

-0.48%

5.96%

5.96%

-10.68%

0.00%

USO

United States Oil

-37.76%

-19.57%

-19.57%

-4.24%

0.00%

UUP

Invesco DB US Dollar Bullish

0.75%

5.91%

5.91%

-0.23%

0.00%

Gold awoke late in 2018, while oil crashed. The U.S. dollar continues to stay elevated, but there are signs that trend is fading as well.

U.S. Treasury Bond

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

IEF

iShares 7-10 Year Treasury Bond ETF

3.86%

0.99%

0.99%

1.51%

2.24%

IEI

iShares 3-7 Year Treasury Bond ETF

2.69%

1.36%

1.36%

1.27%

1.95%

SHV

iShares Short Treasury Bond ETF

0.56%

1.73%

1.73%

0.93%

1.66%

SHY

iShares 1-3 Year Treasury Bond ETF

1.30%

1.46%

1.46%

0.85%

1.72%

TLH

iShares 10-20 Year Treasury Bond ETF

4.67%

0.37%

0.37%

1.80%

2.14%

TLT

iShares 20+ Year Treasury Bond ETF

4.59%

-1.61%

-1.61%

2.82%

2.62%

Treasuries played the classic hero role in the recent risk-off environment. But there is a limit to that trend, if rates continue to head south toward zero again. Unlike the last time that happened, the Fed's QE program has been replaced by monetary tightening. And it is not a short-term plan.

U.S. Credit Bond and Non-U.S. Bond

Ticker

ETF Name

3 Month Total Returns

Year to Date Total Returns

1 Year Total Returns

Annualized 3 Year Total Returns

Dividend Yield (TTM)

AGG

iShares Core US Aggregate Bond ETF

1.85%

0.10%

0.10%

2.01%

2.72%

BKLN

Invesco Senior Loan ETF

-4.70%

-1.31%

-1.31%

3.26%

4.52%

BWX

SPDR® Blmbg Barclays Intl Trs Bd ETF

1.25%

-1.85%

-1.85%

2.78%

1.07%

CWB

SPDR® Blmbg Barclays Convert Secs ETF

-9.45%

-1.96%

-1.96%

7.84%

6.17%

FLOT

iShares Floating Rate Bond ETF

-0.39%

1.48%

1.48%

1.56%

2.41%

HYG

iShares iBoxx $ High Yield Corp Bd ETF

-4.41%

-2.02%

-2.02%

5.63%

5.54%

LQD

iShares iBoxx $ Invmt Grade Corp Bd ETF

-0.59%

-3.79%

-3.79%

3.04%

3.67%

MUB

iShares National Muni Bond ETF

1.90%

0.93%

0.93%

1.81%

2.46%

PCY

Invesco Emerging Markets Sov Debt ETF

-0.75%

-6.15%

-6.15%

3.89%

4.96%

PFF

iShares US Preferred Stock ETF

-5.89%

-4.63%

-4.63%

1.46%

6.32%

PICB

Invesco International Corporate Bond ETF

-2.58%

-7.27%

-7.27%

1.71%

1.70%

TIP

iShares TIPS Bond ETF

-0.52%

-1.42%

-1.42%

2.03%

2.71%

VCIT

Vanguard Interm-Term Corp Bd ETF

0.45%

-1.73%

-1.73%

2.89%

3.61%

VCSH

Vanguard Short-Term Corporate Bond ETF

0.68%

0.92%

0.92%

1.90%

2.65%

My vote for the most intriguing ETF returns on this month's report? Convertible bonds and bank loans during the last 3 months. They both signal that investors are increasingly uncomfortable with the loose standards ("covenants") attached to the middle and lower quality segments of the bond market. Stay tuned.

About the author: Rob Isbitts is the Chief Investment Officer of Sungarden Fund Management, the subadvisor 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, and 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 written two books and hundreds of articles on investing. He can be followed on Twitter at @robisbitts. See his website at Sungardeninvestment.com.

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.