2018… RTM Capital Advisors Calling For A Tactical Approach

If you have been following our work, you know that RTM Capital Advisors has generally been constructive and bullish for U.S. equities since late 2016. Our tactical view was to principally be invested for the duration of 2017. Given the strength of the market, there wasn’t a great need to be tactical. If you got the direction right, the trend was your friend all year long. RTM Capital Advisors again feels that this year will be good for stocks however; investors will need to be more tactical in 2018 to achieve good risk adjusted returns.

The market fundamentals for the U.S. economy look solid and very bright. The critical indicators including: the GDP growth rate, unemployment rate, inflation rate, fed funds & fiscal policy support, recently passed tax cuts and jobs act of 2017, along with what looks like strong expansion in the global economy seem like the perfect combination. These conditions won’t be sustainable, but currently point to strong and steady growth.

The technical side has traditionally shown that when markets have strong up years like 2017, it leads to a strong start to the new year, which so far has come in right on schedule. In addition, (and there is a variety of reasons why this happens) it will often lead to a pullback that tends to get investors nervous. Since this upward move began, and because we have not had more than a 5% pullback in major averages, we are more than overdue. Although it’s RTM Capital Advisors strong belief that the markets could return double-digits again this year, the return will not be as smooth. Last year, we saw double-digits by year end with the worst drawdown of low single-digits. We believe this year could be closer to 1:1, meaning if the market returns 7% for the year, the worst drawdown may be equal to that or possibly worse.

A true measure skill in asset management is the ability to capture as much of the upside while limiting downside exposure. 2017 provided a 3-5x multiple return (depending on the index) on the worst drawdown for the year. It is our strong belief that 2018 will not follow suit. Furthermore, if we are correct that 2017 was the beginning of another cyclical bull run that may continue for a few more years, then it is our opinion that there will be more volatility in the way of bigger pullbacks and potential uncertainty. Many professional investors can be fooled by market trends.  As tactical managers, our early view and a scenario that may come to play out is that the current market will bring in investors early in the year who have missed out on last year’s great run.  This may put them under pressure to sell at some point in the first half if markets weaken. This set-up would create a much more attractive risk entry point for those who are more tactical in their approach.  A scenario such as this is just one of many that could unfold, but illustrates why a tactical approach in 2018 is more important than ever. We don’t believe it will pay to aggressively chase rallies or buy the dips the way it did in 2017.