Since the midterm elections are over, markets can focus on what truly matters. Some worried that the predicted Democratic takeover of the House of Representative would be negative for stocks. Instead, markets had the biggest one-day midterm election rally since 1982. Since then stocks have given up those gains and then bounced back. For 2018, markets are essentially flat. After 2017’s double-digit gains, flat is not unexpected. Markets don’t care who holds the levers of power unless the powers that be do something dumb.
Markets are likely reacting to the usual suspects; let’s look at a few. Corporate earnings drive stock prices. Today’s unusually robust growth rates could prove unsustainable in 2019. Lower earnings often lead to lower valuations.
The Federal Reserve seems poised to raise interest rates incrementally. While no one likes higher interest rates, some of us remember loans with double-digit rates. The interest rate environment, post The Great Recession, is a historical aberration. The strategy of rock-bottom rates alleviated the economic morass we faced a decade ago. As the economy continues to grow, expect higher interest rates. Rising rates could slow economic growth thus hampering stock prices Plus stocks get a double whammy since higher rates provide an alternative to risky assets like stocks and real estate.
America’s current aggressive trade policy has already affected certain industries; some win, but most lose. More importantly, tariffs are taxes paid ultimately by consumers. Saber-rattling threats create unnecessary tension between allies and adversaries alike.
Stock markets tend to be forward-looking, not always, but most of the time. Perhaps market volatility we have seen recently is normal. After all the economic recovery is a bit long in the tooth, a shrinking economy could fall into a recession. Ten years without a recession is out of the ordinary. The aforementioned headwinds could be the catalyst for the next one.
I don’t make predictions about which way the market will go. Anyone who does and gets it right is probably just lucky. When it comes to stocks, I know two things. One day prices will be higher, quite likely much higher. Stocks won’t go to zero either.
Back in the '70s, I backpacked in the Teton Wilderness Area with a Vietnam vet named Skip, and we planned for bears. At the time that’s where The National Park Service sent Yellowstone’s bad bears. He reminded me, the tenderfoot, if we stumbled on a bear to remain calm and not run. Sudden movement could trigger an attack. Fast forward 40 years, if a bear market appears his warning makes sense for investors. Dumping stocks from your 401K plan or IRA when a bear market is pending or in progress could devastate, perhaps fatally, your retirement. An optimal strategy is to identify retirement goals then maintain a portfolio appropriate for your goals and risk tolerance.
You can’t always get what you want but Buz Livingston, CFP can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.