So you’ve gotten over the shock from reviewing your year-end December investment statements, where is the stock market going from here? Of course, no one has a crystal ball, so this is meant as an educational report so you can stay on top of your family’s portfolio and financial decisions. As you have probably seen in the last year, we’ve had some roller-coaster swings in 2018, but more in detail, the downturns seemed to be more “steep” than longer term trends in years past. Another important note is that we re-tested the 2018 lows from February in mid-December when the S&P 500 index was down 19.8% from top to bottom. Many news headlines, in our opinion, may be using a little hyperbole which may have led to some over-selling. The major market indices were down approximately 4-6% for the year, which is not too alarming in historical comparison.
While the national economy still has very strong fundamentals, i.e. historically low taxes, both personal and corporate, optimistic wage growth, positive corporate sales and earnings, historically low unemployment, low interest rates, positive GDP growth, high housing prices, strong consumer spending, healthy M&A growth and reasonable inflation rates, the equity markets are having troubles with continued growth. Many large companies are sitting on more cash than ever before.
With 2017 being such a steady growth uptrend in the markets, more volatility was expected for 2018. One thing that may contribute to this is technology. Information is being shared faster than ever before, but trading technologies are also faster than ever. Many algorithms will trade based on headline keywords, twitter feeds, and downside percentage triggers.
Historically, 10% corrections are quite common, as are even 20% corrections in normal economic cycles. According to Yahoo! Finance, many Wall Street analysts have predicted a positive year for 2019, but continued volatility with a lot of economic and political uncertainties. One of the biggest threats to the equity markets seem to be the geo-political risks with the Trump administration, especially regarding tariffs and trade war discussions. This may likely lead to continued volatility this year. Other potential threats are European (Brexit) and Asian markets in negative territories for a variety of reasons. Emerging markets have taken a large hit and may prove to be a profitable sector over the next decade or so.
The bottom of the market during the Financial Crisis was exactly 10 years ago in March 2009. Many investors have seen a lot of growth since then and want to be prepared should another correction come.
There are some other leading indicators that are showing signs of an economic softening and some analysts predict there could be potential for a recession in the next 18 – 36 months, according to Russell Investments – Global Market Outlook December 2018. New construction in housing sentiment and building is starting to slow nationally, but data is still considered in positive territory according to the National Association of Homebuilders.
Another area of concern at year end were bonds and how the yield curves were flattening. Some analysts have used the 2 year and 10-year bond yield curve as a leading indicator of a recession, as it has been a somewhat accurate predictor in decades past, according to the National Bureau of Economic Research. The last time this inverted was 2007.
While no one can predict the forecasting of the equity markets for certain, we believe the fundamentals are still strong in the short run, but remain cautiously optimistic in the longer term. We have built many of our client’s portfolios to help protect against severe losses on an annual basis using risk management algorithm overlays, short term bonds and indicators, and fixed-indexed insurance products all for diversification for portions of overall portfolios. Remember, if you suffer a 10% loss, you need 11% to breakeven. However, if you suffer a 40% loss, you need a 67% growth to get your portfolio back to breakeven. Shortening this recovery timeframe could be an instrumental part to long-term retirement savings and potential future income.
If you’d like a complimentary second opinion on the potential risks, taxes, and fees for your overall financial and income planning, please reach out to Douglas Marion with Advanced Wealth Strategies at (704) 450-8352 or Douglas@AdvancedWealthStrategies.org and conveniently located at 19520 W. Catawba Ave, Suite 313.
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