Last week was a wild week in the stock market.
This is a time to make smart evaluations about your investment allocation. Seasoned investors knew that it is normal to have some corrections in the stock market. Many investors have become a little bit spoiled. We have been on a nine-year Bull market run.
In 2017, we had very little volatility and over 60 days with new market highs. I recently saw a survey that said 75 percent of investors expected some sort of correction this year. Most professional analysts predicted that this year’s market returns would be 4 percent to 6 percent.
So last week’s market results were not a huge surprise, but they happened more suddenly than most expected. This year, the market was up for January almost as much as many analysts predicted for the year. Most of them stayed with their estimates even after the fast start. This week those January gains disappeared. It is important to remember at the time this column is being written, in the last twelve months, the market is still up 21 percent. It is important to pay more attention to the S&P 500 than the DOW. The DOW is a much smaller sample size.
There are only 30 companies in the DOW. One of them, General Electric, has been struggling and there are rumors that it will soon be dropped from the index. Chevron was the stock that hurt the DOW the most this week. They badly missed on their profit expectations. Several other DOW components in the health care field were hurt by the announcement that Amazon, Citibank and Berkshire were going to work together and explore ways to reduce health care cost.
The market fundamentals are still strong. The economy is growing faster than it has for a while. For the first time in years, there is wage growth. Companies are announcing higher wage due to the tax cut and demand for employees from the growing economy. These are starting to increase inflation. While this is good from many perspectives, it raises the fear that the FED will raise interest rates quicker than anticipated. Federal Reserve policy has probably been the biggest reason that the stock market has soared during this Bull market.
After 2008, the FED reduced interest rates to near zero. This was to stimulate the economy. While the stock markets grew at a rapid rate, the economy grew much slower. This meant that inflation remained in check. Low interest rates and low inflation are the perfect climate for stock market success. Many companies borrowed money at low interest rates to buy back shares of their own stock. This automatically increases earnings per share even if profits do not rise. Having a smaller supply of available stocks helps drive up the price. Earnings per share help to justify these higher prices.
Low interest rates also encouraged investors to take on more risk to get a return on their investments since bonds were paying such a low interest rate. This further increased stock demand. Since the entire stock exchange is a giant auction, the market rose dramatically. This week, we got a new FED chairman, 10-year treasuries rose to 2.85, and inflation started to increase. This was a perfect storm. The market reacted violently.
What should an investor do now? That depends. Determine your risk tolerance. A major component of this is your age and when you need to spend your savings. If you are young, the market will recover at some point. If you need the money in the next few years, maybe you should reconsider your asset allocation. If you are contributing to a 401(k) or other savings vehicle and have time before you need this money, the market could still be a good place.
Do not try to time the market now or ever. No one can do this accurately all the time. Your market money should always be in the market and your non-market money should never be in the market. Have a time perspective that matches with when you need the money.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.
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