Investors were treated to a wild ride in 2018 with the US, International, and Emerging stock market indices all finishing down for the year after a great start in January. To add insult to injury, the typical diversifiers in client portfolios, namely bonds and precious metals, also finished down although not as much. In fact, it was reported that over 93% of all asset classes were down in 2018.
We thought this tweet summed things up pretty accurately.
Some say fears of a slowing economy spooked investors. Another theory is the Fed raising interest rates several times also unsettled both the bond and stock markets. And of course the dreaded ‘T’ word was included as a possible culprit as ‘tariffs’ were a frequent topic in the second half of the year. Others might blame the seeming dysfunction in Washington for creating uncertainty and roiling markets.
Or, it could simply be that any or all of the above were simply catalysts for a downturn that was well overdue. It has been years since a bona fide bear market has happened and US stock markets are quite overvalued.
So now what? We believe investors should remain vigilant. Be prepared for additional volatility as the market tries to decipher the growth outlook for the economy going forward. Are we headed for a recession? While we don’t know the answer to that we can say that recessions are nothing new. It is a natural part of the business cycle and some would say an economic slowdown is long overdue. Stocks will typically show signs of weakness well in advance of evidence of a slow down in the economy so many would call them a ‘leading indicator’. We certainly aren’t predicting anything and in fact after big sell-offs like this one markets can rally strongly as investors look for ‘bargains’. The question is can those gains be maintained.
Our stance remains the same:
- Expectations for future returns in the stock market should be tempered. After the great run stocks have had, and with interest rates rising, it is much more unlikely then likely that the market can justify higher and higher stock price multiples.
- Get or stay diversified. While diversification didn’t work very well in the first 3 quarters of 2018, it paid off nicely in the last quarter and particularly in December as both bonds and gold rallied while the stock market sold off. Long term, diversification is crucial to a sound investing strategy.
- Put things in perspective. If you are a long term investor the short term swings in the market are ultimately meaningless. Frightening sure, but with market corrections comes opportunity. Think to yourself, “Would I panic and sell my house if home prices were falling?” Unlikely, as you would still need a place to live and you know that ultimately things will improve again. Think of your investment portfolio in the same way.
- Have a plan. If you are already doing the first three items you needn’t read further. If you aren’t and are feeling anxious or emotional about your money it may be a good time to seek the advice of a professional. Someone that can look at the situation from an unbiased point of view and help you develop a plan to meet your financial goals.
We wish you a happy, healthy, and prosperous 2019. Thanks for reading!