Last year, stocks marched higher with only minor pullbacks. When the year ended, the largest peak to trough decline for the S&P 500 Index was just under 3% (St. Louis Federal Reserve data on the S&P 500). It was a year that lacked turbulence and one that rewarded diversified investors.
Since the beginning of February, volatility has returned. It’s a reminder that periods of relative tranquility don’t last forever. In our opinion, it’s something that the long-term investor should look past, though we recognize it can create uneasiness among some investors.
If we were facing serious economic problems, something that might be signaling a recession, it would be a cause for concern. Right now, we don’t believe we are. Let’s review two underlying supports for the market.
Thanks in part to the tax cut, corporate profits are forecast to rise nearly 20% this year (Thomson Reuters). Weekly first-time claims for unemployment insurance recently touched a level not seen since the late 1960s (St. Louis Federal Reserve). It’s a concrete sign that companies don’t want to lose employees. If business conditions were deteriorating, the opposite would be true.
The Conference Board’s Leading Economic Index (designed to detect emerging trends in the economy), just hit a new high. We know we are facing some challenges (we always will), but the economic fundamentals are solid right now. Coupled with rates that remain at historically low levels, the fundamentals have cushioned the downside, in our view, and remain supportive of shares. Shorter term, however, headline risk continues to whipsaw sentiment.
Causes of Volatility
Two issues have surfaced that have stirred up volatility, in our view.
Last month President Trump announced he will impose steep tariffs on steel and aluminum imports, fueling concerns over protectionism and the potential impact on the economy. His apparent goal: Pry open foreign markets to U.S. exports.
Let’s just say that it is not our role as your financial advisors to offer up opinions on political issues. However, it is incumbent upon us to analyze and share our thoughts on headlines that are influencing shares. It’s not a political statement. It is a commentary on events viewed through the narrow prism of the market.
Investors viewed the corporate tax cut and the paring back of regulations favorably. Trade tensions, however, have created uncertainty. Most economists support free trade. It’s a net benefit to the U.S. and global economy. But “net benefit” means there are both winners and losers. Losers; those whose jobs disappear amid a flood of cheaper imports. Winners; consumers who pay less for various goods, and those who work in export-oriented industries. In 2017, U.S. exports totaled $2.3 trillion (U.S. Bureau of Economic Analysis).
Free trade versus fair trade. This is a highly debated topic. U.S. manufacturers are consumers of steel and aluminum, including farm and construction equipment, aerospace, and pipelines and drilling equipment in the energy industry.
At the margin, it may modestly boost inflation and could force some U.S. manufacturers to put projects back on the shelf or move production offshore. Additionally, U.S. tariffs may invite retaliation, pressuring exporters, jobs and profits in globally competitive sectors. It could also spark a tit-for-tat trade war that hurts everyone.
As the month came to a close, Trump announced he is set to raise tariffs on Chinese imports. In return, China announced new barriers to some U.S. goods, though the response was measured. While the odds of a major trade war remain low, all this has injected uncertainty into market sentiment.
Meanwhile, troubles popping up in the tech sector have added to volatility. For example, Facebook is embroiled in a controversy over privacy and data sharing. More recently, Trump has set his sights on Amazon, expressing his displeasure in several tweets. Yes, they are only two stocks, but both have performed admirably, leading the tech sector higher. They also have a combined market capitalization of $1.1 trillion (WSJ as/of 4.3.18).
We provided an explanation for the recent volatility because we believe one is in order but let us caution you not to get lost in the weeds. Day traders care about minute-by-minute swings in stocks prices. Long-term investors sidestep such concerns. So, let’s step back and gather some perspective by reviewing the data.
According to LPL Research:
• The average intra-year pullback (peak to trough) for the S&P 500 Index since 1980 has been 13.7%.
• Half of all years had a correction of at least 10%.
• Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
• The average total return for the S&P 500 during a year with a correction was 7.2%.
These bullet points are an evidenced-based way of saying turbulence surfaces from time to time. Patient investors who don’t react emotionally have historically been rewarded. We understand that some degree of risk is inevitable. But our recommendations are designed to minimize risk, and they are designed with your long-term goals in mind.
A study of goals was allegedly conducted on a graduating class from Harvard in the 1950s. Supposedly, only 3% had written goals, and it wasn’t long before they controlled over 90% of the class’s wealth. Maybe you’ve heard the story, maybe not? It may or may not be true, but goals are important because they give us clarity and purpose, something to accomplish.
Have you ever sat down to set goals? Looking at a blank screen or blank piece of paper sometimes gives us the feeling that what we’re trying to accomplish is insurmountable. Or, we come up with something that’s too vague. There are many compartments within life that benefit from goal-setting, career, family, personal, and health. As someone who advises you on financial matters, one of our goals is to uncover your financial goals. This is important in order to create a plan that will put you on a path toward your goals. Remember, the goal is your destination. Once we have the destination in mind, we need a roadmap that will get us there.
Savings, specific purchases, and retirement come up often. These require what might be called “delayed gratification.” You must give up something today in order to achieve a specific result tomorrow. While we can make our money work for us, i.e., compounding, savings requires choices between wants today and needs tomorrow. Let’s start with the basics–budgeting, or what we call a spending plan. Especially for those in transition, this can become an important financial lifeline. Unfortunately, too many folks quickly jot down a budget, place it in a drawer, and forget it.
Instead, take time and customize it to your personal situation. On a spreadsheet or customizable app or software, list your key spending categories at the top from left to right. If you are married, it’s important you work together as a couple to develop a blueprint, one you are both comfortable with. Next, and this is crucial, number the days of the month in the vertical column and record everything you purchase during the month. It sounds tedious but takes only a few minutes each day. Only then will you explicitly see your monthly outflow of funds. You may find areas you can cutback. Or, you may be surprised how much you spend on a specific category.
Your spending plan enables you to free up funds–savings that are needed to reach your financial goals. So, what are your goals? An overriding goal for many “money at the end of the month” rather than “month at the end of the money”! But we need to get more specific. You may want to pay off student loans or your credit cards. Early on, it may be a good idea to quickly whittle down debts, especially high-rate credit cards.
Build up a rainy-day fund of at least six months of expenses. Or, create emergency reserves for various needs. Home repair, auto repair, or health care expenses can pop up when you least anticipate them. If you have funds earmarked for the unexpected, the outflow for life’s little surprises are much easier to manage. Do you dream of owning your first home or purchasing a vacation getaway? You may shoot for a 20% down payment.
Most folks dream of a comfortable retirement. But many fail to save through their firm’s 401(k). At the bare minimum, contribute enough to capture your company’s match. If you don’t, you’re leaving free money on the table. For those who are self-employed, it’s important to begin contributing to a retirement vehicle that best fits your needs. I know that options sometimes breed complexity. But that’s what we’re here for, to help you navigate the murky waters. If you haven’t started, now may be the time to set up a college savings plan. Like retirement planning, there are different avenues we can explore.
Saving for the future takes discipline, but it doesn’t have to be a hard slog. Progress toward your goals creates its own sense of accomplishment and satisfaction. Let’s add a nice carrot. As you reach smaller milestones, reward yourself along the way! It can be anything from a nice dinner out to an inexpensive weekend getaway during the off-season. Decide on something together, something you will both enjoy. More importantly, get started, and please let us know how I may assist you.
We hope you’ve found this review to be educational and helpful. If you have any concerns or questions, let us say this one more time. Please feel free to call our office at 303-741-9772.