Recently, we offered a number of reasons for optimism about continued economic expansion. We cautioned that even in good times markets, especially for stocks, can have serious corrections.
The current correction in the stock market was overdue because certain investors decided they did not want to miss the bull market. Some have waited seven or eight years to get on board, having been mauled in the bear market of 2007-2009. Others, novice investors have been entering the fray, believing that the stock market can only go up. I recently began noticing that people (other than clients) are randomly talking to friends about stocks, something that has been absent from conversations for years. Even the Millennial children and grandchildren of some clients are taking interest. Inexperienced, these folks are having families, have perhaps built up some money in their 401K’s at work and are thinking about the future. Based on fund flows as measured by the Investment Company Institute, massive amounts have been directed into exchange traded funds in recent years. These funds own broad indices of the market, owning great and not-so-great companies together. When selling begins, nearly every sector is impacted, because little intelligent analysis has been applied to stock selection. Retail investors, especially those with little history are easily frightened. I fear that some of the newbies are making the mistake of trading short term like their parents did at one time.
The overriding good news: nearly all financial markets/economies worldwide are in a growth mode, something that happens rarely. Consumers everywhere are more confident. This is not the backdrop for a bear market, as indicated in the year – end overview sent recently to you.
Fixed income markets have not been supportive of late. Long term US treasury bonds have recently jumped to the highest yield level in three years. When bond yields rise, the price of previously issued bonds usually falls. It’s important to remember however that the bull markets of the late 80s and 1990s took place during a higher interest-rate environment and a higher inflation rate environment than we have today. The past 20 months or so have been an aberration, but a good one! What we’ve had was a Goldilocks scenario where, despite very low interest rates and a growing economy, inflation remained under control. Conditions are turning somewhat less favorable, but certainly they are not seriously damaging to the overall economic expansion now in progress. Still, it’s unrealistic to expect the run that began in mid – 2016 to continue at that torrid pace.
Volatility, largely forgotten last year is back and will likely remain at elevated levels for some weeks. I suspect the overall market will consolidate for a number of months, moving up, down and mostly sideways before resuming a modest climb. It would not surprise me to see little upward motion for stocks until autumn. I would be highly surprised if we see total returns for this calendar year anywhere close to what was enjoyed last year but mid-single digit returns will still be above inflation. All that being said, prediction in such a relatively short time frame is nearly impossible. What is possible to see is that corporate balance sheets are strong, the consumer is confident and the millennial generation is finally looking to buy homes and to furnish them for their families. This offers a positive outlook for the coming years. Further, conditions for our major trading partners are equally healthy and should reflect well on US based corporations, if trade wars can be avoided.
That’s the summary for stocks. Recall that your portfolio is balanced among asset classes, and nearly all clients own a blend of equities, fixed income and cash. Over the past few years, balanced portfolios have enjoyed help from fixed income investments that rise as interest rates fall. These instruments sustained us when stock markets were jumpy as they were in 2009-2010, 2011, and 2012. Fixed income augmented your returns even when stocks began a relatively steady rise beginning in mid-2016. It appears we will no longer be able to count on rising prices for bonds and, if held, long dated preferred stock. In fact certain issues have recently given ground. Still, regular interest and dividend payments from bond-like holdings are comforting, when the value of our portfolios reflects a challenging stock market. This balanced approach is designed for times like we have been experiencing the past few trading sessions.
In short, your portfolio looks pretty good to us.
Gary Miller CFP
