A Slow Warm Up

Q1 2019 PastCast

Here’s all you need to know. (If you’re in a rush.)

  • Fear and market sell-off in December is a distant memory
  • Best start to the year for stocks since 1998
  • Brexit may never happen…or it might, but the impacts are impossible to predict
  • US economy continues to grow, although the pace slowed due to several unique factors including the longest government shutdown ever
  • Latest market jargon: “Inverted Yield Curve”
    All this really means is there may be an increased likelihood of the economy slowing down in coming years. “Typical” market behavior. Close to retirement? Here’s why you shouldn’t worry.

Let the good times roll!

It seems like just months ago we were talking clients off the cliff as the market seemed to be collapsing on a daily basis. That’s because it WAS just months ago, as 2018 closed out the year as the worst for the market since the crash in 2008. As we stated in our last PastCast, short-term market swings should be ignored by smart long-term investors. Paying too much attention can tempt investors to make very bad decisions with their hard-earned money.

So, what happened?

Just as investors began to panic and the sell-off of stocks accelerated, good economic news and the fresh start to a new year seemed to flip investor sentiment like a light switch. In a down year like 2018, where most investors experienced losses instead of gains, additional selling (usually by large institutional and high net worth investors) tends to pick-up toward the end of the year. Investors are trying to lock in losses that will help offset gains or reduce their taxable income for the year. In addition to that, we had a major mid-term election and a shift in power in D.C. Political gridlock seemed to spiral out of control as a result, and began what ended up becoming the longest government shutdown in US history. Yay us!

Unfortunately, the fear and panic caused by the widespread selloff toward the end of 2018 sent a lot of long-term investors to the sidelines (hopefully not you!), right as the market was hitting a bottom. What followed was the best January for US stocks in three decades, the best quarter for stocks since 2009, and the best start to any year for stocks since 1998. These past two quarters are a fantastic example of why trying to guess what the market is going to do in any short-term period is a losing game in nearly every example of a market decline throughout history.  

What’s this “inverted yield curve” everyone’s talking about?

While the first few months of 2019 have been terrific for the stock market, anxiety seems to be building among bond investors, thanks to a slightly alarming economic indicator known as the “inverted yield curve”. Here is what a normal yield curve looks like:

 

 

And an inverted one…

 

Though it sounds complicated (and looks complicated) there’s a pretty simple explanation to what we’re looking at here. “Yield” is just another term for “interest rate” essentially, and maturity is the length of time until the investor gets their money back. If interest rates on bonds are predicted to fall in the future, it means investors are anticipating a slowing economy. The reason this is particularly alarming now is that just about every single time this has ever happened, a recession has followed within two years. Sounds like a reason to dump your stocks, right? Per usual, our stance is a hard NO. It’s important for you to keep several things in mind with this:

Reasons NOT to panic:

  1. The economy and the stock market are not one-in-the-same and historically speaking, even if we are in for a recession (we always are at some point), recessions have occurred anywhere from 8-24 months following an inverted yield curve, so it’s anyone’s guess exactly if/when a recession may occur this time. Meanwhile stock market performance often does not align with economic performance and short-term pullbacks have provided fantastic investing opportunities for patient stock investors in every single case throughout our history.
  2.  If you’re closer to retirement, this is why diversification is so important. Keep in mind that only a portion of your portfolio is dedicated to US stocks, while the rest is there to help you weather any potential upcoming storms in the stock market.

What’s next… Keep calm and carry on.

  • While the Brexit circus across the pond had several key deadlines pass without any real resolution, global markets largely shrugged off the chaos. Depending on how this all gets sorted out, markets around the world may see significant volatility, or renewed upside. Either way, this is not something long-term investors should be focused on.
  • Trade talks continue between the US and several of its largest trading partners, including China. A looming deal/no deal between the US and China will certainly impact markets, but global diversification of your portfolio will help mitigate any short-term volatility. This will likely provide further opportunities for long-term investors that stay focused on what really matters – tuning out the noise and focusing on the bigger picture.
  • 2020 Election season is starting to heat up. Get ready for more political gridlock, dramatic debates, and tons of talk about how unique this election is compared to others. It may seem that way now, but they ALWAYS do. Remember this – there is hardly anything our stock market and economy have not been through already. Severe recessions, a Great Depression, multiple World Wars and costly ongoing international conflicts, political scandals and the resignation of a President, terrorist attacks, long periods of inflation and mortgage rates over 20%. We could go on and on…

Yet, the major market indexes like the Dow and S&P 500 currently sit just below all-time highs…To quote Warren Buffett, “All (of the above events) engendered scary headlines; all are now history”

Fun Fact! The average investor’s portfolio declined nearly 10% in 2018, amid market turmoil. Meanwhile, the S&P 500 index only declined about 4% for the year. (According to this article.)

The lesson? Investor portfolios tend to underperform the overall market year after year. That’s because investors are constantly making investment decisions based on emotion and the short-term. (According to this article.) In other words, market timing. History has shown that being patient, ignoring scary headlines, and focusing on maintaining your disciplined long-term approach to investing, is the most consistent recipe for investing success.

 

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