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When in doubt about the market, keep these indicators in mind.
If you’ve been watching the news lately, you’re aware of the volatility in the market, so I wanted to reach out and provide a sense of what we can expect for 2019.
But before I dig into that, I also want to share some thoughts on successful investing. And to that end, I want to share a quote from a hero of mine, Warren Buffett, one of the greatest investors of our time. I’m going to read this so I get it right:
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence (and only Buffett can consider someone with a 130 IQ of ordinary intelligence), what you need is the temperament to control the urges that get other people into trouble in investing.”
Think about that a moment. Warren Buffett doesn’t talk about accessed information, better analysis, or speed. He talks about temperament. So what does that really mean? Let’s take a look at what happens when we succumb to those urges when investing.
If we look back over the last 20 years, the S&P 500 (a good proxy for stocks) has returned about 7.2 percent on an annual basis—assuming reinvestment of dividends—a pretty good return for that time period, according to J.P. Morgan Asset Management & Dalbar, Inc. If you have a portfolio with 60 percent stocks and 40 percent bonds, the return over the last 20 years may have been about 6.2 percent, according to J.P. Morgan Asset Management & Dalbar, Inc. Again, that’s a decent return. Compare that to the 2.6 percent returned by an average investor over the same time period (J.P. Morgan Asset Management & Dalbar, Inc.)
So why is the average investor earning so much less than their potential in the market?
It’s because of temperament.
That’s where your advisor really comes in. An advisor is there to help you fully capture those opportunities in the market, and you do that by staying focused on your long-term plan, even when Jim Cramer is yelling on CNBC and you want to get out of the market because you’re worried. Talk to your advisor. That’s what they’re here for.
With that said, let’s talk about where we’re going in terms of next year’s market. There’s been a lot of volatility in stocks, and bonds haven’t had a great year, either. Now, before I get started, let me preface this by saying that this is the opinion of my company’s Chief Investment Officer, and these statements are based on her research and the opinions of the United Capital Investment Team.
Okay. So we actually had very strong returns the first half of the year, particularly in the stock market. Since then, we have seen increased volatility and more downside. Within those stocks, we’ve seen the market start to rotate towards some more defensive areas. Perhaps this is a key to how you should think about adjusting your portfolio for the upcoming year.
In addition to looking at individual stocks, there are a number of different indicators that can give us an idea of how the economy is doing and where the market might eventually go in the upcoming year. These indicators include:
• Broad Economy
• Health of Businesses and Consumers
• Monetary Policy
• Market Fundamentals
We had strong GDP growth in the first half of 2018, higher than what we’ve seen lately. Activities definitely slowed in the second half of the year though; and looking out into next year, we still think that we’re going to have healthy GDP growth, just a little bit slower than what we had earlier in 2018. This idea applies to the US, not necessarily the rest of the world.
Health Of Business And Consumers
Optimism from CEOs to individuals and companies to consumers is quite strong right now. Even though companies have a little bit higher debt than what we’ve seen previously, the cost of paying that debt is low and there is cash coming in. As seen on the balance sheet, they’re actually quite healthy. Additionally, we haven’t seen a tremendous amount of increase in debt on consumer’s balance sheets. Throw in the fact that jobs are plentiful and wages are increasing, and we still have a quite a positive story to tell here.
This area hasn’t been as positive. We’ve had the Federal Reserve, which oversees U.S. Monetary Policy, tightening for a number of years, slowly raising interest rates and essentially pulling the reigns in on the economy. While that’s not news, we’ve also seen other central banks around the world tap the brakes a bit. In response, the market has started to show signs of concern that the FED and other central banks are pushing on the brakes too much, which we think has resulted in the market volatility over the last couple of months.
This is where we try and assess the health of stocks aside from what’s happening with the underlying economy. One thing we look at is valuations or how much we’re paying for those company earnings. When we compare valuations today, especially relative to the beginning of 2018, we find that stock prices relative to earnings (the so-called PE ratio) is much lower than they had been at the start of last year. In fact, we’re a bit lower than our long-term average, so we think there’s still a lot of market opportunities out there.
Other Indicators: Headlines And Tariffs
Let’s talk about headlines. In addition to the regular indicators I just mentioned, we have to contend with a dizzying barrage of daily headlines. Today, a large focus of those headlines is fixated on trade. The worry seems to be that the introduction of tariffs throws sand into the works of an efficient economy. However, the facts indicate otherwise. When we look at the size of tariffs relative to the size of our economy, it remains relatively small.
The real risk will be the possible psychological impacts caused by the tariffs. If, for example, we start to hear CEOs saying, “Well, I’m worried that next year we’re going to have more tariffs on the products that we sell, so I’m not going to build that next factory, or I’m not going to hire that next worker,” this might be a sign of the broadening psychological impact of trade wars.
I’m not as concerned about trade wars as I think a lot of people are simply because they’re much easier to solve than other, broader economic problems. President Trump and President Xi Jinping could very well sit down and come to an agreement in one meeting. So while we are watching the trade wars closely, at this point we don’t think that they represent a major risk to the market or the economy.
What Should You Do Next?
Kara Murphy, our Chief Investment Officer relays this story in her latest comments where she says she knows how people are feeling about the market because she got that call from her mom who’s always been her “market-worry” bellwether, so to speak. She said, “Kara, I’m worried.” And Kara, as well I know from the calls I get when people are sincerely worried, says that it’s time for a temperament check-up.
So, with that in mind, what should you do next? Here are three things you should do:
1. Talk to your advisor. If your advisor is unavailable or you get some canned answer about the markets, without taking into account your current personal financial situation, consider getting a new advisor.
2. Evaluate your portfolio’s risk level. Ask your advisor if your risk level is still appropriate for your portfolio and your future needs.
3. Honestly communicate your feelings to your advisor because only with that information can he or she really help you to do the right thing.
And finally, your advisor should be equipped with an incredibly robust set of tools to help manage risk and help determine the outcome of any action you or the market takes that could negatively impact your future.
So, with all this in mind, try not to worry too much about your investments. Just take calm, positive action to be sure you are on the right path.
I wish you all the best in the New Year.
Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal. All data quoted in this piece is for informational purposes only, and author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the data. All data are driven from publicly available information and has not been independently verified by the author.