Linda S. Parenti, CFA
Chief Investment Strategist
Stocks are delivering much better performance this year than the previous year, even though the journey has continued to be bumpy. You might recall that in 2018, the S&P 500 started out strong by moving up 6% in January. However, throughout the year the index moved up or down monthly an average of nearly 3%. Then December finished down 9%, resulting in a negative full year total return of 4.4%. As of today’s close, we will have just 13 trading days left to go for 2019. Following a year end like last December and with numerous commentators forecasting a recession going into 2019, investors may not have expected the S&P 500 to be up almost 28% in total return year-to-date.
Surprising in part because the markets have experienced even larger month-to-month swings this year. January again started out great, with stocks climbing 8%. February through April were also positive 2% to 4% months. Then in May equities fell 6%, but rebounded 7% in June. So, what is going on? Well, markets dislike uncertainty, and there is a lot of it right now. A chief concern continues to be our trade relations with other countries, namely China; and the impact tariffs could still have on economic growth.
Looking ahead to 2020, trade developments either positive or negative will continue to lead headlines and rule the market almost daily, just as they have over the past two years. Add to this the 2020 elections are coming which right now include candidates with widely divergent views on fiscal and tax policy. This may keep volatility high and sentiment cautious.
Stock prices are continuing to set new record highs, and we are only three months away from the 11th anniversary of this current bull market. The combination of a lengthy bull run, high valuations, and a growing list of worries has many investors wondering if they should start reducing equities. In small or large degrees, this is the definition of market timing.
It is said that bull markets start with pessimism and end with euphoria. If true, it feels as if we are at the start of a bull market rather than the later stages. This bull market has often been referred to as the most unloved in history. That impression is apparently unchanged. Over the past three years, assets in money market funds have grown by $1 trillion and are now at the highest level in nearly a decade. Apart from soft data sentiment indicators, hard data shows growth is slowing, but it is not negative. Employment has been high, wages are rising, and the consumer is spending. Lower interest rates have boosted housing data and global central banks including our Federal Reserve, are very accommodative. This is not an environment that leads to recession, which is generally what it takes to see a bear market.
Still, uncertainty increases short term volatility, and there is a growing list. Consequently, every economic data point below expectations seems to validate fears that slow growth = recession, tempting investors to sell.
The problem with giving in to selling or market timing is that it takes two correct decisions. Not only when to get out, but when to get back in. Unfortunately, the best time to get back into the market is when fear is highest. This is not a talent easily mastered.
Studies show many of the best performing days occur within two weeks of the worst days. Think about the back to back monthly swings we have experienced over the past two years. Thanks to instantaneous news flow and algorithmic trading programs, market timing has never been a riskier strategy than it is today.
We all know that eventually recessions and bear markets are a certainty. Timing them is not. For long term investors, a financially healthier strategy is to stick with a plan that allocates enough fixed income and cash to weather through a downturn and devote the remaining portion of your portfolio to risk assets such as stocks for growth. Then tactically manage the assets within those allocations. Interest rates are low and may stay low for some time. So, the performance from fixed income assets alone are unlikely to provide the level of return an investor needs long term. Exposure to equities is vital even in retirement to keep ahead of inflation and add growth to your portfolio.
It may be comforting to know that bear markets are historically much shorter than bull markets. Post-World War II, the average bear market has lasted one year, while the average bull market has spanned 4.7 years. It might not feel comfortable to hold stocks during a bear market, but time invested in the market is more valuable and less risky than timing the market. While I expect economic growth to remain positive next year and believe stocks have further upside potential, economies and markets ultimately move in cycles. Regardless of the timing, it is the stage of your life cycle that should determine your asset allocation decisions.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.