It’s Been an “Interesting” Year!
Coming into 2018 the stock market was still chugging along with the momentum of a steady bull market bolstered by corporate tax cuts; however, the bliss began to fade quickly as a series of challenges piled up.
In 2018 we’ve been able to observe, in real time, why our high school economics text books taught us that trade wars are bad. This self-inflicted wound was not helpful by any measure, but it’s also not the entire story. As I mentioned in a March blog post we were beginning to see signs that inflation was gaining momentum, and the Federal Reserve began to do it’s job by broadcasting an intention to continue increasing rates in order to keep inflation under control, and keep the economy from overheating.
As this point stock prices were already high relative to corporate earnings. Trade wars and increasing rates helped trigger the beginning of this choppiness that we hadn’t seen in several years. Fortunately, first quarter corporate earnings came in strong; however, by summer, and as noted in my July blog post, the stock market had already lost all gains for the year. By the third quarter we began to see reports from analysts that companies had reached “peak earnings.”
This was not surprising since GDP growth had peaked by midyear. Assumptions for stock prices are largely based on the expected strength of the economy, and as growth began to slow, stock prices had nowhere to go but down, especially as bond yields increased, creating further headwinds.
Looking at GDP forecasts going into 2019, there is no expectation that we’ll see the kind of growth observed in the first part of 2018. For most of 2018 the expectation was for the Fed to increase rates three times in 2019. The Fed has already started backing away from that notion in public statements, and naturally, the bond market has backed away from that expectation as well.
Over the summer we began to see the investment banks and economists play the age-old game of guessing when the next recession will begin, which is never good for digestive health. Right now, the estimates vary from the end of 2019 to the beginning of 2021 with 2020 conspicuously in the crosshairs. The “R” word is a loaded term, it’s important to keep in mind that recessions are measured with such a lag that the economy is usually out of the recession before the official stamp is given that one occurred.
In practice we’ll know what’s happening because we’ll feel it as unemployment creeps up, corporate revenues decrease, and the Fed cuts rates in an attempt to bolster the economy by reducing borrowing costs.
The Good News
Despite my caution as we look forward; currently, the economy is healthy and strong by most measures. Statements you may see in the media to that effect are absolutely true.
The economy continues to grow, just at a slower clip. Unemployment is so low it has many economists scratching their heads. The stock market has returned to a more reasonable price level, and with rates increasing, savers, who were left out in the cold for a long time, are finally seeing some returns.
Where to Now?
If you’ve followed my blog posts you know a key mantra at Buoyant Financial focuses on asset allocation. This means choosing a mix of stocks and bonds that reflect where you are in life, and your tolerance for risk, or the ups and downs of the market. This is not something that changes based on market conditions.
As the stock market seemed to go nowhere but up coming out of “the Great Recession”, many people began to hold more stocks in their portfolios either by allocating more to stocks, or choosing not to rebalance, which would have resulted in selling stocks to buy bonds along the way.
If you chose to take that approach it’s important to note, you left the world of disciplined asset allocation and began to “trade the market.” Even if it didn’t feel like you were trading, you began to make decisions based on the market, and not your age and risk tolerance.
Now is a great time to get back to a more disciplined approach. Despite the challenges we’re seeing, you’re still probably enjoying returns from many years of market growth. Rebalancing is one simple step you can take, and if needed, step back and look at your overall allocation based on where you are in life. You should never lose sleep over the financial markets!
If you have any questions, please don’t hesitate to reach out. Even if you’re not looking for a financial advisor, I’m always happy to answer questions, and provide perspective.
Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.