Like an unexpected gust of wind that blows the hat off your head or flips your umbrella inside out, last week’s stock market performance startled investors. Looking back, it’s easy to identify some of the factors that may have contributed to investors’ unease and shaken confidence in the markets. Ben Levisohn of Barron’s offered a brief rundown that included:
- The yield on 10-year Treasuries rising to a seven-year high. As interest rates move higher, bonds become more attractive to investors who prefer to take less risk. They move money from stocks into bonds and that can push stock prices lower.
- Federal Reserve Chairman Jerome Powell suggesting the Fed funds target rate could move higher. Investors worry the Federal Reserve is too hawkish and will raise rates too high, too quickly, causing economic growth to stumble.
- A speech by Vice President Mike Pence indicating tensions with China may persist. Companies that export to China or manufacture goods in China are at risk if relations between China and the United States don’t improve. Poor relations could affect profits, share values, and economic growth.
- Earnings reports showing tariffs negatively affecting some companies’ profit margins. FactSet reported, “the term ‘tariff’ has been mentioned during the earnings calls of 12 S&P 500 companies to date, with six of these 12 companies citing a negative impact linked to tariffs.”
- The International Monetary Fund (IMF) lowering its economic growth projections. Concern about the impact of trade tensions on companies around the world led the IMF to lower some of its economic growth estimates for 2018, especially in Asia and emerging markets.
Some analysts believe a desire to take profits also helped fuel the downturn, according to Barron’s Randall W. Forsyth.
Whatever combination of events was responsible, the result was markets losing value on Wednesday and Thursday of last week before regaining some lost ground on Friday. Forsyth wrote, “What turned the U.S. markets around Friday – when the Dow and the S&P 500 managed to pop more than 1 percent and the NASDAQ Composite bounced over 2 percent – wasn’t much clearer than what set off the slide. Market Semiotics’ Woody Dorsey says that his proprietary sentiment polling found a bullish reading of absolute zero on Thursday, a contrarian indication that “panic” would be short-lived.”
While sharp drops in share values are never comfortable, it’s important to consider the bigger picture. A contributor to Bloomberg Opinion wrote, “This decline follows a market that has tripled since 2009, had zero volatility in 2017…This was the 20th time since the bear market ended in 2009 that the Standard & Poor’s 500 Index had a one-day loss of 3 percent. The NASDAQ-100 Index had its eighth 4 percent down day (although it was the biggest one-day fall since August 2011).”
In other words, selloffs are normal and we have experienced them before. So, what should you take away from last week?
- First, it was a reminder that stocks are volatile investments. They have the potential to deliver higher returns than other asset classes because they require investors to take higher levels of risk.
- Second, stock market volatility is one reason we allocate assets and build well-diversified portfolios. Holding different asset classes and diverse investments within a portfolio can help reduce the sting of unwelcome surprises like a sharp drop in the value of stocks.
- Worries about what the future may hold are likely to ruffle investors and we may see additional bouts of market volatility. The current bull market has been running for a long time. Some analysts anticipate recession and a bear market are ahead. As Barron’s reported, neither appears to be here yet: “Other leading indicators, including jobless claims and credit spreads, also held up. ‘I don’t see this all leading to recession,’ says Ed Yardeni, president of Yardeni Research. ‘And, without a recession, I don’t think we get a bear market.’”
No matter how intellectually rational these points seem, downturns tend to leave everyone feeling jittery and uncertain. So, take a moment. Think about your portfolio and how it was built to help you achieve your financial goals. Now, ask yourself:
- Have my goals changed?
- Has my risk tolerance changed?
If the answer to either of these questions is, ‘Yes,’ call us. We’ll sit down, review your goals and risk tolerance, and make sure your portfolio is structured appropriately.
We’re hoping for calmer markets ahead, but we may be in for a bumpy ride.
On a lighter note…
It’s important to recognize when daily challenges affect our ability to cope and take steps to lower stress when they do. The Mayo Clinic recommends laughter, “Whether you’re guffawing at a sitcom on TV or quietly giggling at a newspaper cartoon, laughing does you good. Laughter is a great form of stress relief, and that’s no joke.” In the hope of offsetting some of last week’s stress, here is humor from F In Exams:
The Very Best Totally Wrong Test Answers by Richard Benson:
Question: What is a vibration?
Answer: There are good vibrations and bad vibrations. Good vibrations were discovered in the 1960s.
Question: What happens when your body starts to age?
Answer: When you get old your organs work less effectively and you can become intercontinental.
Question: What is a fibula?
Answer: A little lie.
Question: Give three ways to reduce heat loss in your home.
Answer: 1) Thermal underwear; 2) Move to Hawaii; 3) Close the door.
Question: You are at a friend’s party. Six cupcakes are distributed among nine plates, and there is no more than one cake per plate. What is the probability of receiving a plate with a cake on it?
Answer: None, if my sister is invited too.
Question: Explain the dispersal of various farming types in the Midwest.
Answer: The cows and pigs are distributed in different fields so they don’t eat each other.
Question: Name six animals that live specifically in the Arctic.
Answer: Two polar bears Three Four seals
Sometimes, laughter is truly the best medicine.
Weekly Focus – Think About It
“In the business world, the rearview mirror is always clearer than the windshield.”
–Warren Buffett, American businessman, speaker, and philanthropist
John F. Reutemann, Jr., CLU, CFP®
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Investment advice offered through Research Financial Strategies, a registered investment advisor.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
* This newsletter and commentary expressed should not be construed as investment advice.
* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
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* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
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