Yes, No, Maybe - Where is the Market Headed?
Submitted by Desmond Wealth Management, Inc. on September 5th, 2016Have you ever met or approached a professional at a social event and been tempted to ask a personal question that relates specifically to your circumstances? We know we have.
Whether it’s a physician, attorney, or CPA when in need of assistance, one can benefit from receiving additional insight from the experts. Of course, we typically shy away from any direct questions, but the temptation sometimes arises.
While we are reluctant to pry a bit of free information from someone who has painstakingly developed their specialized skill set, we find that we're very open to discussing financial planning with folks we meet when we're out and about. For starters, we truly enjoy what we do and we receive a tremendous amount of satisfaction assisting those who seek our advice.
However, there is one topic we shy away from – and it’s one we get questions about quite often:
Where do We believe the market is headed?
Long term, stocks are an integral part of most portfolios; historical data supports this point, but many folks who ask us for our opinion want to know the market’s direction over a much shorter period – you know, what’s going to happen after the U.K.’s Brexit vote? Or how will stocks perform before and after the election?
We understand the inquiry. Financial advisors have their fingers on the pulse of the market, the economy, and there is this expectation that we have some sort of inside information.
Although we did not expect what happened in Europe to have a lasting impact at home, admittedly, we were surprised by the sharp bounce in stocks and subsequent all-time highs in the Dow Jones Industrials and the broader-based S&P 500 Index. In some respects, the political earthquake in the U.K. shook up our markets for just two days before cooler heads prevailed and shares began an upward ascent.
While we have reiterated in the past that we have no magic crystal ball (and let us remind you, neither does anyone else), let us take a moment to explain why our approach leans heavily on diversification and eschews market timing.
Simply put, very intelligent individuals don’t always get it right?
But what about the consensus? Would that offer solace? Not really.
The Bespoke Report reviewed the recent history of Wall Street predictions. Since 2000, the consensus among Wall Street analysts has never projected a decline in the stock market for that particular calendar year. Yet the market fell in five of those years (New York Times: “One Market Prediction Is Sure: Wall Street Will Be Wrong”).
During July, the S&P 500 Index finally eclipsed its prior all-time closing high setback on May 21, 2015 (St. Louis Federal Reserve).
An all-time high typically brings in two types of inquiries. It gives some investors a false sense of confidence, and they want to up the ante. Others decide a high is a good time to sell everything.
Given the abundance of caution in the economy and the high level of negative sentiment that abounds, we're hearing the latter versus the former, but again, we caution against market timing.
By itself, a new high isn’t a reason to sell.
Since the bull market started in 2009, there have been 45 record highs for the S&P 500 Index in 2013, 53 in 2014, and 10 in 2015 (LPL Research). Since topping the prior high on July 11, the S&P 500 has gone on to close at six more highs during the month (St. Louis Federal Reserve).
Again, by itself, a new high isn’t a reason to go to cash.
|
MTD %
|
YTD %
|
3-year* %
|
---|---|---|---|
Dow Jones Industrial Average
|
+2.8
|
+5.8
|
+5.9
|
NASDAQ Composite
|
+6.6
|
+3.1
|
+12.8
|
S&P 500 Index
|
+3.6
|
+6.3
|
+8.9
|
Russell 2000 Index
|
+5.9
|
+7.4
|
+5.4
|
MSCI World ex-USA**
|
+4.9
|
-0.2
|
-0.9
|
MSCI Emerging Markets**
|
+4.7
|
+10.0
|
-2.7
|
Source: Wall Street Journal, MSCI.com
MTD returns: June 30, 2016 - Jul 29, 2016
YTD returns: December 31, 2015 - Jul 29, 2016
*Annualized
**in US dollars
What we do counsel is to avoid emotionally based decisions. In our experience, they rarely work.
When fear is high, some investors become uncomfortable with the equity allocation in their portfolios. This may even occur during a garden-variety correction that lops around 10% off the major indexes.
If this is the case, we may need to revisit your asset allocation, especially if your tolerance for risk has changed. In addition, changes in your personal situation may warrant updates to your financial plan. If that’s the case, let’s talk.
It’s somewhat counterintuitive, but a post-Brexit world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.
However, it’s not all gloom. While the U.S. economy is expanding at a subpar pace, it is growing, and the consumer is leading the way (U.S. BEA), which supports corporate earnings.
Speaking of earnings, once again Q2 earnings are topping a low hurdle (Thomson Reuters). More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.
Meanwhile, let’s not discount the positive impact of strong corporate buybacks of shares.
Over the last 12 months, ending March 31, S&P 500 companies shelled out a record $589.4 billion to repurchase shares of their own stock, according to S&P Dow Jones Indexes.
Undoubtedly, there is plenty of economic uncertainty, which discourages firms from making significant investments in new factories and equipment, but it’s not discouraging companies from trying to support share prices via buybacks.
Finally, a cautious Fed has been a plus for equities simply because low interest rates create less competition for stocks. If we were in a recession and profits were sliding, low rates would likely do little to support equities, in my view, but again, the economy is expanding, albeit modestly.
What’s an investor to do?
Recognize that we are in an uncertain period. As the economic recovery enters its eighth year (National Bureau of Economic Research), the expansion is no longer young. It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.
One of our goals has always been to assist you as you reach for your financial goals. That is why we strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad.
As we’ve mentioned in previous articles, we will eventually enter a recession, and recessions have historically brought about a downturn in stocks. We don’t know when it will happen, but it will. It’s an inevitable byproduct of a free market economy.
While declines in the major averages that exceed 20% can be unnerving, they have always run their course historically, setting the stage for another upward cycle that takes shares to new highs.
We hope you’ve found this review to be educational and helpful. As we always emphasize, it is our job to assist you.