You may be wondering what has been going on recently in the stock market – if you aren’t, then you’re probably taking advantage of having an investment manager who monitors that for you. If you are – then read on, as we will dig into some interesting topics along the way!
If you’ve read any of our blogs in the last 18 months then you already know some of the major market moving factors, but here’s a reminder:
Market volatility is magnified by algorithmic trading – based on specific triggers and rules, instead of rational analysis.
When the Federal Reserve raises interest rates, that tightens the flow of money – money is more expensive. This is one of the tools used to keep the economy from overheating.
When the Federal Reserve lowers interest rates, that eases the flow of money – money is cheaper. This is a tool used to stimulate the economy.
Trade war with China is causing great uncertainty, and has many variables:
Capital spending decisions are more difficult for businesses.
Could eventually take a toll on the American consumer, although we don’t see that in the economic data yet.
Global supply chain disruption.
Reduced Volume (normal in August)
Are iPhone’s going to become even more expensive?
Here’s what happened in the last 30 days
July 31st the Fed cut interest rates by a quarter point. In the press conference afterward, Jerome Powell (Fed Chair) said that it wasn’t the start of a long cycle of interest rate cuts and alluded that it was only 25 basis points instead of 50 for several reasons – one of the major factors being that the trade war had been tame the last couple of months. The next day President Trump announced a 10% tariff would be placed on the remaining $300 billion of goods coming from China. We believe this was for two primary reasons. First, a trade delegation just returned from China and they didn’t make the progress they wanted to make. Second, we think the President wants further rate cuts – his twitter feed frequently calls for more rate cuts. However, we believe he may be using the trade war not only to level the trade imbalance with China but also to get further rate cuts from the Federal Reserve. By escalating things further he may have increased the likelihood of additional rate cuts this year.
With the trade war looming, we need to take a look at the big picture. President Trump has on numerous occasions touted the success of the stock market and the US economy under his administration. So if he wants the market’s success to be a building block for a second term, why is he causing so much volatility to rip through the market over and over again? We believe he is okay with short term pain in exchange for long term gain. Fast forward to the end of 2019, with enough uncertainty from the trade war, we may very well see at least one if not two more rate cuts in 2019. This has the potential to be a tailwind for the market. Then at some point in the next 6-8 months, it would not be a surprise to see a trade deal with China, another building block for the President’s reelection campaign as well as another tailwind for the stock market and global growth. We believe that through to the end of 2019 and into 2020 the news you hear will actually begin to improve, with the potential of further rate cuts and a trade deal on the horizon there are several major factors that can drive the market higher. Powell has mentioned several times that the Fed would like to sustain this expansion for as long as possible because the benefits are just recently spreading to the lower class and they would like to see that sustained. The President has control of one of the biggest headwinds to the market (trade war) and he loves to talk about the success of the market under his administration. Considering both of these and other factors, we are anticipating an improvement in the narrative going forward, we can be sure there will be bumps along the way, but we do anticipate overall improvement.
Much of the negative news is often priced into the market, which means that when things improve it’s not uncommon for markets to react positively. History would suggest that when fear is high and things seem out of control, that’s typically a good time to turn off the news, let cooler heads prevail, and stay the course with your investment plan.
It’s likely we will continue to see volatility in the market as long as our President continues to use his Twitter account. Does that mean investors should stay away from the stock market? We certainly don’t think so. At any given time in history, there have been multiple reasons not to invest in the stock market. However, history also tells us that equities tend to be the best performing asset class in the long run.
If you need to use/spend 100% of your assets within the next 6 months, it’s probably not a good idea to put your money into the stock market because you never know where it may be 6 months from now when you have to pull your money out. However, if your time horizon is longer than that and for most people their time horizon is many years, then it probably makes sense to take advantage of the best performing asset class we’ve seen throughout history.
It’s fairly safe to say that most of us reading this blog posting, lived through the financial crisis of 2007 and 2008 – the worst stock market crash since the great depression. Let’s walk through a scenario together. Imagine you’ve finally decided you want to invest your $100,000 of savings into the stock market (S&P 500 index – see chart below) and the date is October 1st 2007 – about 15 days before the stock market hits a new record high – and 15 days before the market proceeds to drop roughly 55% over the next 18 months. A year and a half later, you’re left with an account value of $45,000. There’s a good chance you’d have panicked at some point during those 18 months and pulled your savings out of the market, or switched to a “safer” asset class. No one would blame you. See the chart below for the ride you would have experienced.
Now let’s continue the journey. Let’s assume you decided to stay the course with your investments, you’ve got a good head on your shoulders and know that despite the months and months of bad news you’ve endured, history tells you that the stock market is the most profitable place to put your money in the long term. Fast forward to today. You decided to stay the course, despite seeing your account value drop by over 50% in the first year and a half of your investment horizon. Today (11-12 years later) your account value is $241,700 and you’ve made a tidy profit of roughly 141.7% if you had been reinvesting your dividends along the way. All you had to do is wait and be patient. Along this timeline, there were MANY days when, as an investor, it would have been easy to talk yourself into getting out of the market – take Christmas Eve 2018 as an example. However, we can see that over time, the stock market tends to recover and even break out into new highs – which we have seen on numerous occasions in 2019. Take a look at the chart below to see the complete journey we’ve just walked through.
Why did we walk through that scenario? First, to relive some of the good old days where virtually anyone and everyone could get a mortgage and home values only went up (or so everyone thought). Second and more importantly, to recalibrate our investment perspective. It’s easy to see a news headline and panic because it could have an adverse effect on your investments. That’s a totally normal feeling to have. However, we know that feelings don’t often make the best decisions – particularly the feelings of fear and greed. So it’s important to keep a big picture perspective when it comes to investing.
If you’ve made it this far, thanks for sticking with us, hopefully this blog provided clarity and understanding, and through that, some peace of mind. Thank you for the trust you place in us at MFG, we appreciate you and are working hard on your behalf each and every day.
Authored by: Michael McCracken CFP®, ChFC and Jeffrey Gardner, Financial Advisor The information presented above has been prepared for informational purposes only and the commentary represent the opinions of the author and are subject to change at any time due to market or economic conditions or other factors.